Investors Should Be Encouraged By Parkson Retail Asia's (SGX:O9E) Returns On Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. 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?

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. To calculate this metric for Parkson Retail Asia, this is the formula:

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

0.39 = S$59m ÷ (S$335m - S$184m) (Based on the trailing twelve months to March 2023).

So, Parkson Retail Asia has an ROCE of 39%. In absolute terms that's a great return and it's even better than the Multiline Retail industry average of 5.5%.

Check out our latest analysis for Parkson Retail Asia

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 Parkson Retail Asia, check out these free graphs here.

What Does the ROCE Trend For Parkson Retail Asia Tell Us?

The fact that Parkson Retail Asia is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses five years ago, but now it's earning 39% which is a sight for sore eyes. In addition to that, Parkson Retail Asia is employing 50% more capital than previously which is expected of a company that's 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 55% 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. Nevertheless, there are some potential risks the company is bearing with current liabilities that high, so just keep that in mind.

The Bottom Line On Parkson Retail Asia's ROCE

To the delight of most shareholders, Parkson Retail Asia has now broken into profitability. And with a respectable 88% 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. In light of that, we think it's worth looking further into this stock because if Parkson Retail Asia can keep these trends up, it could have a bright future ahead.

One more thing: We've identified 5 warning signs with Parkson Retail Asia (at least 1 which is concerning) , and understanding them would certainly be useful.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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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