Landrich Holding (HKG:2132) May Have Issues Allocating Its Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. However, after briefly looking over the numbers, we don't think Landrich Holding (HKG:2132) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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 Landrich Holding:

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

0.11 = HK$31m ÷ (HK$591m - HK$309m) (Based on the trailing twelve months to September 2022).

Therefore, Landrich Holding has an ROCE of 11%. On its own, that's a standard return, however it's much better than the 7.0% generated by the Construction industry.

See our latest analysis for Landrich Holding

Historical performance is a great place to start when researching a stock so above you can see the gauge for Landrich Holding's ROCE against it's prior returns. If you'd like to look at how Landrich Holding has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From Landrich Holding's ROCE Trend?

In terms of Landrich Holding's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 11% from 59% five years ago. However it looks like Landrich Holding might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. 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.

On a side note, Landrich Holding has done well to pay down its current liabilities to 52% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE. Keep in mind 52% is still pretty high, so those risks are still somewhat prevalent.

The Bottom Line

To conclude, we've found that Landrich Holding is reinvesting in the business, but returns have been falling. Since the stock has declined 30% over the last year, investors may not be too optimistic on this trend improving either. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

If you want to continue researching Landrich Holding, you might be interested to know about the 3 warning signs that our analysis has discovered.

While Landrich Holding isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.