Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at Asiatic Group (Holdings) (Catalist:5CR) so let's look a bit deeper.

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 Asiatic Group (Holdings) is:

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

0.074 = S$2.2m ÷ (S$54m - S$24m) (Based on the trailing twelve months to September 2023).

So, Asiatic Group (Holdings) has an ROCE of 7.4%. On its own that's a low return on capital but it's in line with the industry's average returns of 7.0%.

See our latest analysis for Asiatic Group (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 Asiatic Group (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 Asiatic Group (Holdings)'s ROCE Trending?

You'd find it hard not to be impressed with the ROCE trend at Asiatic Group (Holdings). The data shows that returns on capital have increased by 69% over the trailing five years. The company is now earning S$0.07 per dollar of capital employed. Interestingly, the business may be becoming more efficient because it's applying 56% less capital than it was five years ago. Asiatic Group (Holdings) may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 44% of the business, which is more than it was five years ago. And with current liabilities at those levels, that's pretty high.

What We Can Learn From Asiatic Group (Holdings)'s ROCE

From what we've seen above, Asiatic Group (Holdings) has managed to increase it's returns on capital all the while reducing it's capital base. And since the stock has dived 80% over the last five years, there may be other factors affecting the company's prospects. In any case, we believe the economic trends of this company are positive and looking into the stock further could prove rewarding.

On a separate note, we've found 3 warning signs for Asiatic Group (Holdings) you'll probably want to know about.

While Asiatic Group (Holdings) 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.