Returns Are Gaining Momentum At Natural Cool Holdings (Catalist:5IF)

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. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at Natural Cool Holdings (Catalist:5IF) so let's look a bit deeper.

What Is Return On Capital Employed (ROCE)?

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 Natural Cool Holdings is:

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

0.021 = S$961k ÷ (S$94m - S$48m) (Based on the trailing twelve months to June 2023).

Therefore, Natural Cool Holdings has an ROCE of 2.1%. In absolute terms, that's a low return and it also under-performs the Commercial Services industry average of 6.6%.

See our latest analysis for Natural Cool Holdings

roce

Historical performance is a great place to start when researching a stock so above you can see the gauge for Natural Cool Holdings' ROCE against it's prior returns. If you're interested in investigating Natural Cool Holdings' past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Natural Cool Holdings Tell Us?

Natural Cool Holdings has broken into the black (profitability) and we're sure it's a sight for sore eyes. The company now earns 2.1% on its capital, because five years ago it was incurring losses. While returns have increased, the amount of capital employed by Natural Cool Holdings has remained flat over the period. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.

On a separate but related note, it's important to know that Natural Cool Holdings has a current liabilities to total assets ratio of 51%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line

In summary, we're delighted to see that Natural Cool Holdings has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Astute investors may have an opportunity here because the stock has declined 42% in the last five years. With that in mind, we believe the promising trends warrant this stock for further investigation.

On a final note, we've found 2 warning signs for Natural Cool Holdings that we think you should be aware of.

While Natural Cool 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.