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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in CosmoSteel Holdings' (SGX:B9S) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on CosmoSteel Holdings is:

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

0.026 = S$2.3m ÷ (S$98m - S$11m) (Based on the trailing twelve months to September 2022).

Therefore, CosmoSteel Holdings has an ROCE of 2.6%. In absolute terms, that's a low return and it also under-performs the Energy Services industry average of 4.1%.

View our latest analysis for CosmoSteel 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'd like to look at how CosmoSteel Holdings has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is CosmoSteel Holdings' ROCE Trending?

Shareholders will be relieved that CosmoSteel Holdings has broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 2.6% on its capital. While returns have increased, the amount of capital employed by CosmoSteel Holdings has remained flat over the period. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.

On a related note, the company's ratio of current liabilities to total assets has decreased to 11%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

The Bottom Line

To bring it all together, CosmoSteel Holdings has done well to increase the returns it's generating from its capital employed. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 43% return over the last five years. In light of that, we think it's worth looking further into this stock because if CosmoSteel Holdings can keep these trends up, it could have a bright future ahead.

If you'd like to know more about CosmoSteel Holdings, we've spotted 2 warning signs, and 1 of them doesn't sit too well with us.

While CosmoSteel Holdings 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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