Nam Cheong (SGX:1MZ) Is Very Good At Capital Allocation

Yahoo

18-06-2025

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, the ROCE of Nam Cheong (SGX:1MZ) looks great, so lets see what the trend can tell us.
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Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Nam Cheong, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.28 = RM295m ÷ (RM1.3b - RM208m) (Based on the trailing twelve months to March 2025).
Therefore, Nam Cheong has an ROCE of 28%. In absolute terms that's a great return and it's even better than the Machinery industry average of 4.4%.
Check out our latest analysis for Nam Cheong
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Nam Cheong.
The trends we've noticed at Nam Cheong are quite reassuring. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 28%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 69%. So we're very much inspired by what we're seeing at Nam Cheong thanks to its ability to profitably reinvest capital.
On a related note, the company's ratio of current liabilities to total assets has decreased to 17%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.
To sum it up, Nam Cheong has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has only returned 20% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So with that in mind, we think the stock deserves further research.
On a separate note, we've found 4 warning signs for Nam Cheong you'll probably want to know about.
If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.
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