To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in Hor Kew's (SGX:BBP) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What Is It?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Hor Kew is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.0046 = S$340k ÷ (S$169m - S$96m) (Based on the trailing twelve months to December 2022).

So, Hor Kew has an ROCE of 0.5%. Ultimately, that's a low return and it under-performs the Construction industry average of 4.8%.

See our latest analysis for Hor Kew

Historical performance is a great place to start when researching a stock so above you can see the gauge for Hor Kew's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Hor Kew, check out these free graphs here.

How Are Returns Trending?

It's great to see that Hor Kew has started to generate some pre-tax earnings from prior investments. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 0.5% on their capital employed. In regards to capital employed, Hor Kew is using 25% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. Hor Kew could be selling under-performing assets since the ROCE is improving.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 57% of the business, which is more than it was five years ago. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

The Bottom Line On Hor Kew's ROCE

In a nutshell, we're pleased to see that Hor Kew has been able to generate higher returns from less capital. Given the stock has declined 34% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.

If you want to know some of the risks facing Hor Kew we've found 5 warning signs (3 can't be ignored!) that you should be aware of before investing here.

While Hor Kew isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

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