Landrich Holding (HKG:2132) Will Be Hoping To Turn Its Returns On Capital Around

There are a few key trends to look for if we want to identify the next multi-bagger. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at Landrich Holding (HKG:2132) 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)

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. The formula for this calculation on Landrich Holding is:

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

0.026 = HK$8.3m ÷ (HK$626m - HK$306m) (Based on the trailing twelve months to September 2024).

So, Landrich Holding has an ROCE of 2.6%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 6.9%.

Check out 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're interested in investigating Landrich Holding's past further, check out this free graph covering Landrich Holding's past earnings, revenue and cash flow.

What Does the ROCE Trend For Landrich Holding Tell Us?

On the surface, the trend of ROCE at Landrich Holding doesn't inspire confidence. Around five years ago the returns on capital were 50%, but since then they've fallen to 2.6%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

On a related note, Landrich Holding has decreased its current liabilities to 49% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money. Either way, they're still at a pretty high level, so we'd like to see them fall further if possible.

Our Take On Landrich Holding'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 Landrich Holding. And there could be an opportunity here if other metrics look good too, because the stock has declined 46% in 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.

Landrich Holding does have some risks, we noticed 4 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

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.