Yahoo Finance Be Wary Of Riverstone Holdings (SGX:AP4) And Its Returns On Capital
What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. Having said that, from a first glance at Riverstone Holdings (SGX:AP4) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
What Is 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. The formula for this calculation on Riverstone Holdings is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.14 = RM250m ÷ (RM1.8b - RM85m) (Based on the trailing twelve months to December 2023).
Therefore, Riverstone Holdings has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 9.2% generated by the Medical Equipment industry.
View our latest analysis for Riverstone Holdings
Above you can see how the current ROCE for Riverstone Holdings 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 Riverstone Holdings .
How Are Returns Trending?
On the surface, the trend of ROCE at Riverstone Holdings doesn't inspire confidence. Over the last five years, returns on capital have decreased to 14% from 21% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.
On a side note, Riverstone Holdings has done well to pay down its current liabilities to 4.6% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.
The Key Takeaway
From the above analysis, we find it rather worrisome that returns on capital and sales for Riverstone Holdings have fallen, meanwhile the business is employing more capital than it was five years ago. Since the stock has skyrocketed 147% over the last five years, it looks like investors have high expectations of the stock. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.
On a final note, we've found 1 warning sign for Riverstone Holdings that we think you should be aware of.
While Riverstone Holdings isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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.
