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If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in Lum Chang Holdings' (SGX:L19) returns on capital, so let's have a look.
Understanding Return On Capital Employed (ROCE)
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Lum Chang Holdings is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.061 = S$14m ÷ (S$439m - S$203m) (Based on the trailing twelve months to June 2024).
Therefore, Lum Chang Holdings has an ROCE of 6.1%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 11%.
See our latest analysis for Lum Chang Holdings
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'd like to look at how Lum Chang Holdings has performed in the past in other metrics, you can view this free graph of Lum Chang Holdings' past earnings, revenue and cash flow.
So How Is Lum Chang Holdings' ROCE Trending?
We're pretty happy with how the ROCE has been trending at Lum Chang Holdings. We found that the returns on capital employed over the last five years have risen by 734%. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. In regards to capital employed, Lum Chang Holdings appears to been achieving more with less, since the business is using 53% less capital to run its operation. Lum Chang Holdings may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.
For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 46% of the business, which is more than it was five years ago. And with current liabilities at those levels, that's pretty high.