There are a few key trends to look for if we want to identify the next multi-bagger. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. Having said that, from a first glance at Sin Heng Heavy Machinery (SGX:BKA) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper 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 Sin Heng Heavy Machinery is:

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

0.046 = S$5.3m ÷ (S$128m - S$11m) (Based on the trailing twelve months to June 2023).

Therefore, Sin Heng Heavy Machinery has an ROCE of 4.6%. Ultimately, that's a low return and it under-performs the Trade Distributors industry average of 8.6%.

View our latest analysis for Sin Heng Heavy Machinery

Historical performance is a great place to start when researching a stock so above you can see the gauge for Sin Heng Heavy Machinery's ROCE against it's prior returns. If you're interested in investigating Sin Heng Heavy Machinery's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Sin Heng Heavy Machinery's ROCE Trend?

We've noticed that although returns on capital are flat over the last five years, the amount of capital employed in the business has fallen 23% in that same period. To us that doesn't look like a multi-bagger because the company appears to be selling assets and it's returns aren't increasing. In addition to that, since the ROCE doesn't scream "quality" at 4.6%, it's hard to get excited about these developments.

One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 8.6% of total assets, is good to see from a business owner's perspective. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.

In Conclusion...

Overall, we're not ecstatic to see Sin Heng Heavy Machinery reducing the amount of capital it employs in the business. Since the stock has gained an impressive 89% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

On a final note, we've found 2 warning signs for Sin Heng Heavy Machinery that we think you should be aware of.

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

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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.