What trends should we look for when identifying stocks that can multiply in value over the long term? A common approach is to find a company that Returns on capital employed (ROCE), combined with a growing Crowd of the capital employed. Simply put, these types of companies are compound interest machines, meaning that they continually reinvest their profits at ever higher returns. So when we looked at Far East Group (Catalyst: 5TJ) and its ROCE trend, we really liked what we saw.

Return on Capital Employed (ROCE): What is it?

For those who don’t know what ROCE is, it measures the amount of pre-tax profit a company can generate with the capital employed in its business. To calculate this metric for Far East Group, the formula is:

Return on capital = earnings before interest and taxes (EBIT) ÷ (total assets – current liabilities)

0.017 = S$1.1 million ÷ (S$118 million – S$49 million) (Based on the last twelve months to June 2024).

Therefore, Far East Group has a ROCE of 1.7%. In absolute terms, this is a low return and it is also below the industry average for retail distribution of 6.1%.

Check out our latest analysis for Far East Group

Historical performance is a good place to start when analyzing a stock. Above you can see Far East Group’s ROCE compared to past earnings. If you want to look at historical earnings, check out free Charts with detailed information on the sales and cash flow development of the Far East Group.

What can we learn from Far East Group’s ROCE trend?

We are pleased to see that Far East Group is capitalising on its investments and is now profitable. While the company is now profitable, five years ago it was making losses on invested capital. In terms of capital employed, Far East Group is using 23% less capital than it was five years ago, which on the surface may suggest that the company has become more efficient in generating those returns. Far East Group may sell underperforming assets as ROCE improves.

The story continues

As an aside, we noted that the improvement in ROCE appears to be partly due to an increase in current liabilities. Essentially, the company now finances about 41% of its operations through suppliers or short-term lenders, which is not ideal. Given this fairly high ratio, we would like to remind investors that short-term liabilities of this size can pose certain risks in certain companies.

What we can learn from the Far East Group’s ROCE

In short, we are pleased to see that Far East Group has been able to generate higher returns with less capital. There may be an opportunity here for smart investors, as the stock has fallen 57% over the past five years. With that in mind, we believe the promising trends warrant further investigation into this stock.

Since virtually every company faces risks, it is important to be aware of them. We have 4 warning signs for the Far East Group (3 of which should not be ignored!) that you should know about.

For those who like to invest in solid companies, look at this free List of companies with solid balance sheets and high returns on equity.

Do you have feedback on this article? Are you concerned about the content? Contact us directly from us. Alternatively, send an email to editorial-team (at) simplywallst.com.

This Simply Wall St article is of a general nature. We comment solely on the basis of historical data and analyst forecasts, using an unbiased methodology. Our articles do not constitute financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Simply Wall St does not hold any of the stocks mentioned.