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. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. However, after investigating Leong Hup International Berhad (KLSE:LHI), we don't think it's current trends fit the mold of a multi-bagger.
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. To calculate this metric for Leong Hup International Berhad, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.11 = RM451m ÷ (RM6.6b - RM2.6b) (Based on the trailing twelve months to March 2023).
Therefore, Leong Hup International Berhad has an ROCE of 11%. On its own, that's a standard return, however it's much better than the 8.5% generated by the Food industry.
Check out our latest analysis for Leong Hup International Berhad
Above you can see how the current ROCE for Leong Hup International Berhad 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 report on analyst forecasts for the company.
What Can We Tell From Leong Hup International Berhad's ROCE Trend?
In terms of Leong Hup International Berhad's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 11% from 15% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.
Our Take On Leong Hup International Berhad's ROCE
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Leong Hup International Berhad. These growth trends haven't led to growth returns though, since the stock has fallen 27% over the last three years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.