Be Wary Of Brook Crompton Holdings (SGX:AWC) And Its Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Brook Crompton Holdings (SGX:AWC) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. To calculate this metric for Brook Crompton Holdings, this is the formula:

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

0.081 = S$3.3m ÷ (S$60m - S$19m) (Based on the trailing twelve months to December 2022).

Therefore, Brook Crompton Holdings has an ROCE of 8.1%. Even though it's in line with the industry average of 8.1%, it's still a low return by itself.

View our latest analysis for Brook Crompton Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Brook Crompton Holdings' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Brook Crompton Holdings, check out these free graphs here.

So How Is Brook Crompton Holdings' ROCE Trending?

On the surface, the trend of ROCE at Brook Crompton Holdings doesn't inspire confidence. Around five years ago the returns on capital were 11%, but since then they've fallen to 8.1%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

The Key Takeaway

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Brook Crompton Holdings. And there could be an opportunity here if other metrics look good too, because the stock has declined 18% in the last five years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

Brook Crompton Holdings does come with some risks though, we found 5 warning signs in our investment analysis, and 2 of those are a bit concerning...

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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