Be Wary Of Lam Soon (Hong Kong) (HKG:411) And Its Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think Lam Soon (Hong Kong) (HKG:411) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Lam Soon (Hong Kong), this is the formula:

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

0.086 = HK$254m ÷ (HK$3.8b - HK$828m) (Based on the trailing twelve months to June 2022).

So, Lam Soon (Hong Kong) has an ROCE of 8.6%. On its own that's a low return on capital but it's in line with the industry's average returns of 8.7%.

See our latest analysis for Lam Soon (Hong Kong)

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

So How Is Lam Soon (Hong Kong)'s ROCE Trending?

When we looked at the ROCE trend at Lam Soon (Hong Kong), we didn't gain much confidence. Over the last five years, returns on capital have decreased to 8.6% from 16% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Key Takeaway

To conclude, we've found that Lam Soon (Hong Kong) is reinvesting in the business, but returns have been falling. And with the stock having returned a mere 24% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

On a final note, we've found 1 warning sign for Lam Soon (Hong Kong) that we think you should be aware of.

While Lam Soon (Hong Kong) 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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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.