What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Penguin International's (SGX:BTM) returns on capital, so let's have a look.
Return On Capital Employed (ROCE): What Is It?
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 Penguin International is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.04 = S$9.0m ÷ (S$318m - S$90m) (Based on the trailing twelve months to December 2022).
So, Penguin International has an ROCE of 4.0%. Ultimately, that's a low return and it under-performs the Machinery industry average of 5.8%.
View our latest analysis for Penguin International
Historical performance is a great place to start when researching a stock so above you can see the gauge for Penguin International's ROCE against it's prior returns. If you'd like to look at how Penguin International has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
What Can We Tell From Penguin International's ROCE Trend?
The fact that Penguin International is now generating some pre-tax profits from its prior investments is very encouraging. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 4.0% on its capital. In addition to that, Penguin International is employing 56% more capital than previously which is expected of a company that's trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.
On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 28% of its operations, which isn't ideal. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.