Here's What To Make Of Left Field Printing Group's (HKG:1540) Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Left Field Printing Group (HKG:1540), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What is it?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Left Field Printing Group, this is the formula:

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

0.033 = HK$9.1m ÷ (HK$333m - HK$54m) (Based on the trailing twelve months to June 2020).

Therefore, Left Field Printing Group has an ROCE of 3.3%. In absolute terms, that's a low return and it also under-performs the Commercial Services industry average of 9.9%.

View our latest analysis for Left Field Printing Group

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Left Field Printing Group, check out these free graphs here.

What Can We Tell From Left Field Printing Group's ROCE Trend?

On the surface, the trend of ROCE at Left Field Printing Group doesn't inspire confidence. To be more specific, ROCE has fallen from 18% over the last four 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, Left Field Printing Group has done well to pay down its current liabilities to 16% 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.

The Bottom Line On Left Field Printing Group's ROCE

In summary, we're somewhat concerned by Left Field Printing Group's diminishing returns on increasing amounts of capital. Long term shareholders who've owned the stock over the last year have experienced a 22% depreciation in their investment, so it appears the market might not like these trends either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Left Field Printing Group (of which 1 is significant!) that you should know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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