Landrich Holding (HKG:2132) Will Want To Turn Around Its Return Trends

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Landrich Holding (HKG:2132), it didn't seem to tick all of these boxes.

What Is 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 Landrich Holding:

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

0.16 = HK$49m ÷ (HK$652m - HK$342m) (Based on the trailing twelve months to September 2023).

So, Landrich Holding has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the Construction industry average of 8.3% it's much better.

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'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.

So How Is Landrich Holding's ROCE Trending?

When we looked at the ROCE trend at Landrich Holding, we didn't gain much confidence. To be more specific, ROCE has fallen from 56% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a related note, Landrich Holding has decreased its current liabilities to 52% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. 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. 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

In summary, despite lower returns in the short term, we're encouraged to see that Landrich Holding is reinvesting for growth and has higher sales as a result. And long term investors must be optimistic going forward because the stock has returned a huge 162% to shareholders in the last three years. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

If you'd like to know more about Landrich Holding, we've spotted 4 warning signs, and 1 of them makes us a bit uncomfortable.

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.