Lever Style (HKG:1346) May Have Issues Allocating Its Capital

There are a few key trends to look for if we want to identify the next multi-bagger. 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. Having said that, while the ROCE is currently high for Lever Style (HKG:1346), we aren't jumping out of our chairs because returns are decreasing.

Understanding Return On Capital Employed (ROCE)

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. Analysts use this formula to calculate it for Lever Style:

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

0.24 = US$9.7m ÷ (US$96m - US$55m) (Based on the trailing twelve months to June 2022).

Thus, Lever Style has an ROCE of 24%. In absolute terms that's a great return and it's even better than the Luxury industry average of 12%.

View our latest analysis for Lever Style

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

What Does the ROCE Trend For Lever Style Tell Us?

When we looked at the ROCE trend at Lever Style, we didn't gain much confidence. To be more specific, while the ROCE is still high, it's fallen from 38% where it was five years ago. 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. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, Lever Style has done well to pay down its current liabilities to 57% 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. Either way, they're still at a pretty high level, so we'd like to see them fall further if possible.

What We Can Learn From Lever Style's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Lever Style is reinvesting for growth and has higher sales as a result. And the stock has done incredibly well with a 134% return over the last three years, so long term investors are no doubt ecstatic with that result. 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.

If you want to know some of the risks facing Lever Style we've found 3 warning signs (1 doesn't sit too well with us!) that you should be aware of before investing here.

Lever Style is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.