If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. So when we looked at Choo Chiang Holdings (Catalist:42E) and its trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

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. Analysts use this formula to calculate it for Choo Chiang Holdings:

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

0.19 = S$12m ÷ (S$77m - S$14m) (Based on the trailing twelve months to June 2023).

Therefore, Choo Chiang Holdings has an ROCE of 19%. On its own, that's a standard return, however it's much better than the 9.1% generated by the Specialty Retail industry.

Check out our latest analysis for Choo Chiang Holdings

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 want to delve into the historical earnings, revenue and cash flow of Choo Chiang Holdings, check out these free graphs here.

The Trend Of ROCE

Investors would be pleased with what's happening at Choo Chiang Holdings. The data shows that returns on capital have increased substantially over the last five years to 19%. The amount of capital employed has increased too, by 40%. So we're very much inspired by what we're seeing at Choo Chiang Holdings thanks to its ability to profitably reinvest capital.

What We Can Learn From Choo Chiang Holdings' ROCE

To sum it up, Choo Chiang Holdings has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 81% return over the last five years. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

One more thing: We've identified 3 warning signs with Choo Chiang Holdings (at least 1 which shouldn't be ignored) , and understanding them would certainly be useful.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.