Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. Speaking of which, we noticed some great changes in LHT Holdings' (SGX:BEI) returns on capital, so let's have a look.
What Is Return On Capital Employed (ROCE)?
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 LHT Holdings, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.08 = S$5.1m ÷ (S$68m - S$4.2m) (Based on the trailing twelve months to June 2022).
Therefore, LHT Holdings has an ROCE of 8.0%. On its own that's a low return on capital but it's in line with the industry's average returns of 8.0%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for LHT Holdings' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of LHT Holdings, check out these free graphs here.
How Are Returns Trending?
The fact that LHT Holdings is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses five years ago, but now it's earning 8.0% which is a sight for sore eyes. Not only that, but the company is utilizing 37% more capital than before, but that's to be expected from a company trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.
The Bottom Line On LHT Holdings' ROCE
Long story short, we're delighted to see that LHT Holdings' reinvestment activities have paid off and the company is now profitable. Since the stock has only returned 35% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.
If you want to know some of the risks facing LHT Holdings we've found 4 warning signs (2 don't sit too well with us!) that you should be aware of before investing here.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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