If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. Although, when we looked at Grand Venture Technology (SGX:JLB), it didn't seem to tick all of these boxes.
Understanding Return On Capital Employed (ROCE)
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Grand Venture Technology is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.092 = S$15m ÷ (S$204m - S$45m) (Based on the trailing twelve months to December 2022).
So, Grand Venture Technology has an ROCE of 9.2%. On its own that's a low return, but compared to the average of 6.4% generated by the Machinery industry, it's much better.
See our latest analysis for Grand Venture Technology
In the above chart we have measured Grand Venture Technology's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Grand Venture Technology here for free.
What Can We Tell From Grand Venture Technology's ROCE Trend?
When we looked at the ROCE trend at Grand Venture Technology, we didn't gain much confidence. Around five years ago the returns on capital were 16%, but since then they've fallen to 9.2%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.
On a related note, Grand Venture Technology has decreased its current liabilities to 22% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.
What We Can Learn From Grand Venture Technology's ROCE
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Grand Venture Technology. And the stock has done incredibly well with a 123% return over the last three years, so long term investors are no doubt ecstatic with that result. So should these growth trends continue, we'd be optimistic on the stock going forward.