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. 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. Ergo, when we looked at the ROCE trends at Sheng Siong Group (SGX:OV8), we liked what we saw.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Sheng Siong Group is:

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

0.25 = S$153m ÷ (S$849m - S$247m) (Based on the trailing twelve months to March 2024).

So, Sheng Siong Group has an ROCE of 25%. That's a fantastic return and not only that, it outpaces the average of 8.5% earned by companies in a similar industry.

Above you can see how the current ROCE for Sheng Siong Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Sheng Siong Group .

What Can We Tell From Sheng Siong Group's ROCE Trend?

We'd be pretty happy with returns on capital like Sheng Siong Group. The company has consistently earned 25% for the last five years, and the capital employed within the business has risen 76% in that time. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. If Sheng Siong Group can keep this up, we'd be very optimistic about its future.

In Conclusion...

In short, we'd argue Sheng Siong Group has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. And since the stock has risen strongly over the last five years, it appears the market might expect this trend to continue. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.

If you want to continue researching Sheng Siong Group, you might be interested to know about the 1 warning sign that our analysis has discovered.

Sheng Siong Group is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.