There Are Reasons To Feel Uneasy About Leo Group's (SZSE:002131) Returns On Capital

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. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Leo Group (SZSE:002131) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Leo Group:

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

0.016 = CN¥263m ÷ (CN¥24b - CN¥7.2b) (Based on the trailing twelve months to September 2023).

So, Leo Group has an ROCE of 1.6%. Ultimately, that's a low return and it under-performs the Media industry average of 4.9%.

Check out our latest analysis for Leo Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for Leo Group's ROCE against it's prior returns. If you're interested in investigating Leo Group's past further, check out this free graph covering Leo Group's past earnings, revenue and cash flow.

What Does the ROCE Trend For Leo Group Tell Us?

On the surface, the trend of ROCE at Leo Group doesn't inspire confidence. Around five years ago the returns on capital were 6.4%, but since then they've fallen to 1.6%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Bottom Line On Leo Group's ROCE

To conclude, we've found that Leo Group is reinvesting in the business, but returns have been falling. Unsurprisingly, the stock has only gained 27% over the last five years, which potentially indicates that investors are accounting for this going forward. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

If you'd like to know about the risks facing Leo Group, we've discovered 1 warning sign that you should be aware of.

While Leo Group may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.