What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, the ROCE of Leon Fuat Berhad (KLSE:LEONFB) looks great, so lets see what the trend can tell us.
Understanding 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. Analysts use this formula to calculate it for Leon Fuat Berhad:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.23 = RM153m ÷ (RM1.1b - RM463m) (Based on the trailing twelve months to June 2022).
Thus, Leon Fuat Berhad has an ROCE of 23%. In absolute terms that's a great return and it's even better than the Metals and Mining industry average of 13%.
See our latest analysis for Leon Fuat Berhad
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 Leon Fuat Berhad's past further, check out this free graph of past earnings, revenue and cash flow.
The Trend Of ROCE
We like the trends that we're seeing from Leon Fuat Berhad. Over the last five years, returns on capital employed have risen substantially to 23%. The amount of capital employed has increased too, by 108%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.
On a side note, Leon Fuat Berhad's current liabilities are still rather high at 42% of total assets. 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.
What We Can Learn From Leon Fuat Berhad's ROCE
In summary, it's great to see that Leon Fuat Berhad can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And since the stock has fallen 33% over the last five years, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.