There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Lii Hen Industries Bhd (KLSE:LIIHEN) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What Is It?

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 Lii Hen Industries Bhd, this is the formula:

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

0.11 = RM68m ÷ (RM685m - RM90m) (Based on the trailing twelve months to December 2023).

Thus, Lii Hen Industries Bhd has an ROCE of 11%. That's a relatively normal return on capital, and it's around the 10% generated by the Consumer Durables industry.

See our latest analysis for Lii Hen Industries Bhd

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're interested in investigating Lii Hen Industries Bhd's past further, check out this free graph covering Lii Hen Industries Bhd's past earnings, revenue and cash flow.

So How Is Lii Hen Industries Bhd's ROCE Trending?

When we looked at the ROCE trend at Lii Hen Industries Bhd, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 11% from 21% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, Lii Hen Industries Bhd has done well to pay down its current liabilities to 13% of total assets. That could partly explain why the ROCE has dropped. 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.