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Did you know there are some financial metrics that can provide clues of a potential multi-bagger? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. And in light of that, the trends we're seeing at Parkson Retail Asia's (SGX:O9E) look very promising so lets take a look.
Understanding Return On Capital Employed (ROCE)
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Parkson Retail Asia, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.34 = S$47m ÷ (S$283m - S$142m) (Based on the trailing twelve months to June 2024).
Thus, Parkson Retail Asia has an ROCE of 34%. In absolute terms that's a great return and it's even better than the Multiline Retail industry average of 6.4%.
See our latest analysis for Parkson Retail Asia
Historical performance is a great place to start when researching a stock so above you can see the gauge for Parkson Retail Asia's ROCE against it's prior returns. If you're interested in investigating Parkson Retail Asia's past further, check out this free graph covering Parkson Retail Asia's past earnings, revenue and cash flow.
What The Trend Of ROCE Can Tell Us
We're delighted to see that Parkson Retail Asia is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses five years ago, but now it's earning 34% which is a sight for sore eyes. Not only that, but the company is utilizing 130% more capital than before, but that's to be expected from a company trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.
In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 50%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. This tells us that Parkson Retail Asia has grown its returns without a reliance on increasing their current liabilities, which we're very happy with. Nevertheless, there are some potential risks the company is bearing with current liabilities that high, so just keep that in mind.