What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we’d want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we’ve noticed some promising trends at SUTL Enterprise (SGX:BHU) so let’s look a bit deeper.
Understanding Return On Capital Employed (ROCE)
If you haven’t worked with ROCE before, it measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for SUTL Enterprise, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.084 = S$8.7m ÷ (S$122m – S$18m) (Based on the trailing twelve months to June 2023).
So, SUTL Enterprise has an ROCE of 8.4%. In absolute terms, that’s a low return, but it’s much better than the Hospitality industry average of 3.9%.
See our latest analysis for SUTL Enterprise
Historical performance is a great place to start when researching a stock so above you can see the gauge for SUTL Enterprise’s ROCE against it’s prior returns. If you’d like to look at how SUTL Enterprise has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
What The Trend Of ROCE Can Tell Us
SUTL Enterprise is showing promise given that its ROCE is trending up and to the right. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 37% over the last five years. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. It’s worth looking deeper into this though because while it’s great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.
Our Take On SUTL Enterprise’s ROCE
In summary, we’re delighted to see that SUTL Enterprise has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Since the stock has returned a solid 70% to shareholders over the last five years, it’s fair to say investors are beginning to recognize these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.
One more thing to note, we’ve identified 2 warning signs with SUTL Enterprise and understanding them should be part of your investment process.
While SUTL Enterprise may not currently earn the highest returns, we’ve compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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.
