What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at the ROCE trend of Parkson Retail Asia (SGX:O9E) we really liked what we saw.

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 Parkson Retail Asia is:

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

0.35 = S$52m ÷ (S$322m - S$171m) (Based on the trailing twelve months to June 2023).

Therefore, Parkson Retail Asia has an ROCE of 35%. In absolute terms that's a great return and it's even better than the Multiline Retail industry average of 5.8%.

See our latest analysis for Parkson Retail Asia

Historical performance is a great place to start when researching a stock so above you can see the gauge for Parkson Retail Asia's ROCE against it's prior returns. If you'd like to look at how Parkson Retail Asia has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Parkson Retail Asia's ROCE Trending?

The fact that Parkson Retail Asia 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 35% on its capital. Not only that, but the company is utilizing 79% more capital than before, but that's to be expected from a company trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

One more thing to note, Parkson Retail Asia has decreased current liabilities to 53% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. This tells us that Parkson Retail Asia has grown its returns without a reliance on increasing their current liabilities, which we're very happy with. However, current liabilities are still at a pretty high level, so just be aware that this can bring with it some risks.

The Bottom Line On Parkson Retail Asia's ROCE

Overall, Parkson Retail Asia gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. And with a respectable 79% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. Therefore, we think it would be worth your time to check if these trends are going to continue.

If you'd like to know more about Parkson Retail Asia, we've spotted 3 warning signs, and 1 of them doesn't sit too well with us.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning 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.