Leoch International Technology (HKG:842) Might Be Having Difficulty Using Its Capital Effectively

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. In light of that, when we looked at Leoch International Technology (HKG:842) and its ROCE trend, we weren't exactly thrilled.

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. The formula for this calculation on Leoch International Technology is:

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

0.063 = CN¥256m ÷ (CN¥9.1b - CN¥5.0b) (Based on the trailing twelve months to December 2020).

So, Leoch International Technology has an ROCE of 6.3%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 8.2%.

Check out our latest analysis for Leoch International Technology

Above you can see how the current ROCE for Leoch International Technology compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

How Are Returns Trending?

In terms of Leoch International Technology's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 9.9%, but since then they've fallen to 6.3%. 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 side note, Leoch International Technology's current liabilities are still rather high at 55% 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.

Our Take On Leoch International Technology's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Leoch International Technology is reinvesting for growth and has higher sales as a result. These trends are starting to be recognized by investors since the stock has delivered a 34% gain to shareholders who've held over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

On a separate note, we've found 1 warning sign for Leoch International Technology you'll probably want to know about.

While Leoch International Technology 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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