Many Would Be Envious Of Lever Style's (HKG:1346) Excellent Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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. That's why when we briefly looked at Lever Style's (HKG:1346) ROCE trend, we were very happy with what we saw.

We've discovered 2 warning signs about Lever Style. View them for free.

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

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

0.30 = US$19m ÷ (US$95m - US$32m) (Based on the trailing twelve months to December 2024).

Thus, Lever Style has an ROCE of 30%. In absolute terms that's a great return and it's even better than the Luxury industry average of 13%.

View our latest analysis for Lever Style

Above you can see how the current ROCE for Lever Style compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Lever Style .

What Can We Tell From Lever Style's ROCE Trend?

Lever Style deserves to be commended in regards to it's returns. The company has employed 81% more capital in the last five years, and the returns on that capital have remained stable at 30%. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. If these trends can continue, it wouldn't surprise us if the company became a multi-bagger.

On a side note, Lever Style has done well to reduce current liabilities to 33% of total assets over the last five years. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.

In Conclusion...

In summary, we're delighted to see that Lever Style has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. On top of that, the stock has rewarded shareholders with a remarkable 344% return to those who've held over the last five years. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

Lever Style does have some risks though, and we've spotted 2 warning signs for Lever Style that you might be interested in.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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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.