Investors Could Be Concerned With Left Field Printing Group's (HKG:1540) Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. However, after briefly looking over the numbers, we don't think Left Field Printing Group (HKG:1540) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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 Left Field Printing Group is:

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

0.047 = HK$15m ÷ (HK$373m - HK$58m) (Based on the trailing twelve months to June 2021).

Thus, Left Field Printing Group has an ROCE of 4.7%. Ultimately, that's a low return and it under-performs the Commercial Services industry average of 9.3%.

View our latest analysis for Left Field Printing Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for Left Field Printing Group's ROCE against it's prior returns. If you're interested in investigating Left Field Printing Group's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Left Field Printing Group's ROCE Trending?

When we looked at the ROCE trend at Left Field Printing Group, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 4.7% from 18% five years ago. 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, Left Field Printing Group has done well to pay down its current liabilities to 16% 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.

In Conclusion...

In summary, despite lower returns in the short term, we're encouraged to see that Left Field Printing Group is reinvesting for growth and has higher sales as a result. Furthermore the stock has climbed 43% over the last year, it would appear that investors are upbeat about the future. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

One final note, you should learn about the 4 warning signs we've spotted with Left Field Printing Group (including 1 which shouldn't be ignored) .

While Left Field Printing Group 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.
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