Our Take On The Returns On Capital At Leeport (Holdings) (HKG:387)

There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. Having said that, from a first glance at Leeport (Holdings) (HKG:387) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. The formula for this calculation on Leeport (Holdings) is:

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

0.0035 = HK$1.8m ÷ (HK$847m - HK$342m) (Based on the trailing twelve months to December 2020).

Therefore, Leeport (Holdings) has an ROCE of 0.4%. Ultimately, that's a low return and it under-performs the Trade Distributors industry average of 4.1%.

Check out our latest analysis for Leeport (Holdings)

Historical performance is a great place to start when researching a stock so above you can see the gauge for Leeport (Holdings)'s ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Leeport (Holdings), check out these free graphs here.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Leeport (Holdings), we didn't gain much confidence. To be more specific, ROCE has fallen from 1.6% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a side note, Leeport (Holdings)'s current liabilities are still rather high at 40% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Key Takeaway

In summary, we're somewhat concerned by Leeport (Holdings)'s diminishing returns on increasing amounts of capital. Investors haven't taken kindly to these developments, since the stock has declined 14% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Leeport (Holdings) 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. 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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