Does Lam Soon (Hong Kong) (HKG:411) Have The Makings Of A Multi-Bagger?

Did you know there are some financial metrics that can provide clues of a potential 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at Lam Soon (Hong Kong) (HKG:411) so let's look a bit deeper.

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)

0.15 = HK$375m ÷ (HK$3.2b - HK$717m) (Based on the trailing twelve months to June 2020).

So, Lam Soon (Hong Kong) has an ROCE of 15%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Food industry average of 13%.

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'd like to look at how Lam Soon (Hong Kong) has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

Investors would be pleased with what's happening at Lam Soon (Hong Kong). The data shows that returns on capital have increased substantially over the last five years to 15%. Basically the business is earning more per dollar of capital invested and in addition to that, 42% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

The Bottom Line

To sum it up, Lam Soon (Hong Kong) has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And a remarkable 212% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.

If you'd like to know about the risks facing Lam Soon (Hong Kong), we've discovered 1 warning sign that you should be aware of.

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This article by Simply Wall St is general in nature. 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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