If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Amongst other things, we’ll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company’s amount of capital employed. This shows us that it’s a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in Sin Heng Heavy Machinery’s (SGX:BKA) returns on capital, so let’s have a look.

What Is Return On Capital Employed (ROCE)?

For those that aren’t sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Sin Heng Heavy Machinery is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)

0.062 = S$7.3m ÷ (S$128m – S$10.0m) (Based on the trailing twelve months to December 2023).

Therefore, Sin Heng Heavy Machinery has an ROCE of 6.2%. On its own, that’s a low figure but it’s around the 7.5% average generated by the Trade Distributors industry.

Check out our latest analysis for Sin Heng Heavy Machinery

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you’d like to look at how Sin Heng Heavy Machinery has performed in the past in other metrics, you can view this free graph of Sin Heng Heavy Machinery’s past earnings, revenue and cash flow.

So How Is Sin Heng Heavy Machinery’s ROCE Trending?

Sin Heng Heavy Machinery has broken into the black (profitability) and we’re sure it’s a sight for sore eyes. The company now earns 6.2% on its capital, because five years ago it was incurring losses. While returns have increased, the amount of capital employed by Sin Heng Heavy Machinery has remained flat over the period. That being said, while an increase in efficiency is no doubt appealing, it’d be helpful to know if the company does have any investment plans going forward. So if you’re looking for high growth, you’ll want to see a business’s capital employed also increasing.

In Conclusion…

In summary, we’re delighted to see that Sin Heng Heavy Machinery has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Since the stock has returned a staggering 131% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Story continues

One more thing, we’ve spotted 2 warning signs facing Sin Heng Heavy Machinery that you might find interesting.

While Sin Heng Heavy Machinery isn’t earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.