There are some key trends we need to look out for when identifying the next multibagger. First, we want to identify a proven return on the capital employed (ROCE), which is increasing, and secondly a growing base 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. Speaking of which, we have seen some big changes in Singapore Airlines’ (SGX:C6L) returns on capital, so let’s take a look.
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. Analysts use this formula to calculate it for Singapore Airlines:
Return on capital = earnings before interest and taxes (EBIT) ÷ (total assets – current liabilities)
0.087 = S$2.8 billion ÷ (S$44 billion – S$13 billion) (Based on the last twelve months to March 2024).
Therefore, Singapore Airlines has a ROCE of 8.7%. This is a low number in itself, but it is roughly equivalent to the average turnover of 8.1% in the airline industry.
Check out our latest analysis for Singapore Airlines
In the chart above, we have compared Singapore Airlines’ ROCE with past performance, but the future is arguably more important. If you are interested, you can check out analyst forecasts in our free Analyst report for Singapore Airlines.
What the ROCE trend can tell us
Even though ROCE is still low in absolute terms, it’s good to see that it’s heading in the right direction. Data shows that return on capital has increased significantly to 8.7% over the past five years. The company is effectively making more money per dollar of capital employed, and it’s worth noting that the amount of capital employed has also increased by 37%. This may indicate that there are plenty of opportunities to invest capital internally and at increasingly higher rates, a combination that’s common among multibaggers.
Finally…
In summary, Singapore Airlines has proven that it can reinvest in the business and generate higher returns on capital employed, which is great. Given that the stock has only returned 14% to shareholders over the past five years, the promising fundamentals may not have been recognized by investors yet. With that in mind, we would take a closer look at this stock in case it has other characteristics that could help it multiply in the long run.
Singapore Airlines poses some risks, as we have found 2 warning signs (and 1 that is possibly serious) that we think you should know about.
If you want to look for solid companies with high returns, check out this free List of companies with good balance sheets and impressive return on equity.
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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.
