If you’re not sure where to start when looking for the next multi-bagger, there are a few key trends you should watch out for. Among other things, we’ll want to see two things; first of all, a growth to recover on capital employed (ROCE) and on the other hand, an expansion of the amount capital employed. Basically, it means that a business has profitable initiatives that it can continue to reinvest in, which is a hallmark of a dialing machine. With that in mind, we’ve noticed some promising trends at First resources (SGX: EB5) so let’s look a little deeper.
Return on capital employed (ROCE): what is it?
For those who don’t know what ROCE is, it measures the amount of pre-tax profit a business can generate from the capital employed in its business. Analysts use this formula to calculate it for the first resources:
Return on capital employed = Profit before interest and taxes (EBIT) Ã· (Total assets – Current liabilities)
0.13 = US $ 180 million Ã· (US $ 1.7 billion – US $ 355 million) (Based on the last twelve months up to June 2021).
So, First Resources has a ROCE of 13%. In absolute terms, that’s a pretty normal return, and it’s pretty close to the food industry average of 12%.
Check out our latest scan for first resources
In the chart above, we measured First Resources’ past ROCE against its past performance, but the future is arguably more important. If you are interested, you can view analyst forecasts in our free analyst forecast report for the company.
What can we say about the ROCE trend of First Resources?
First Resources did not disappoint the growth in its ROCE. Specifically, while the company has kept capital employed relatively stable over the past five years, ROCE has climbed 45% at the same time. Basically, the business generates higher returns from the same amount of capital and this is proof that there are improvements in the efficiency of the business. It’s worth digging deeper into, because while it is good for the company to be more efficient, it could also mean that in the future the areas in which to invest internally for organic growth are lacking.
By the way, we’ve noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Current liabilities have increased to 21% of total assets, so the company is now more funded by its suppliers or short-term creditors. Keep an eye out for future increases, because when the ratio of current liabilities to total assets becomes particularly high, it can introduce new risks to the business.
To sum up, First Resources collects higher returns for the same amount of capital, and that’s impressive. Since the stock has only returned 12% to shareholders over the past five years, promising fundamentals may not yet be recognized by investors. With that in mind, we would dig deeper into this stock in case there were more traits that could cause it to multiply in the long term.
If you’re interested in learning more about First Resources, we’ve spotted 2 warning signs, and 1 of them is a bit disturbing.
Although First Resources doesn’t generate the highest return, check out this free list of companies that generate high returns on equity with strong balance sheets.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.
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