Returns On Capital Are Showing Encouraging Signs At Asia Enterprises Holding (SGX:A55)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, we've noticed some promising trends at Asia Enterprises Holding (SGX:A55) so let's look a bit deeper.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Asia Enterprises Holding, this is the formula:

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

0.053 = S$5.7m ÷ (S$121m - S$13m) (Based on the trailing twelve months to December 2022).

So, Asia Enterprises Holding has an ROCE of 5.3%. Ultimately, that's a low return and it under-performs the Trade Distributors industry average of 8.1%.

See our latest analysis for Asia Enterprises Holding

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

So How Is Asia Enterprises Holding's ROCE Trending?

Asia Enterprises Holding has not disappointed with their ROCE growth. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 582% over the last five years. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

In Conclusion...

As discussed above, Asia Enterprises Holding appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Since the stock has only returned 7.5% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

Asia Enterprises Holding does have some risks, we noticed 5 warning signs (and 2 which don't sit too well with us) we think you should know about.

While Asia Enterprises Holding may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.

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