What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. That's why when we briefly looked at Best World International's (SGX:CGN) ROCE trend, we were very happy with what we saw.
Return On Capital Employed (ROCE): What Is It?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Best World International:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.36 = S$192m ÷ (S$705m - S$168m) (Based on the trailing twelve months to March 2023).
Therefore, Best World International has an ROCE of 36%. That's a fantastic return and not only that, it outpaces the average of 10% earned by companies in a similar industry.
See our latest analysis for Best World International
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're interested in investigating Best World International's past further, check out this free graph of past earnings, revenue and cash flow.
How Are Returns Trending?
We'd be pretty happy with returns on capital like Best World International. Over the past five years, ROCE has remained relatively flat at around 36% and the business has deployed 287% more capital into its operations. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. If these trends can continue, it wouldn't surprise us if the company became a multi-bagger.
Our Take On Best World International's ROCE
In summary, we're delighted to see that Best World International has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. Therefore it's no surprise that shareholders have earned a respectable 56% return if they held over the last five years. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.
One more thing, we've spotted 1 warning sign facing Best World International that you might find interesting.