Lam Soon (Hong Kong) (HKG:411) Is Reinvesting At Lower Rates Of Return

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. In light of that, when we looked at Lam Soon (Hong Kong) (HKG:411) and its ROCE trend, we weren't exactly thrilled.

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. The formula for this calculation on Lam Soon (Hong Kong) is:

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

0.054 = HK$159m ÷ (HK$3.6b - HK$672m) (Based on the trailing twelve months to December 2023).

So, Lam Soon (Hong Kong) has an ROCE of 5.4%. In absolute terms, that's a low return and it also under-performs the Food industry average of 8.6%.

View 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're interested in investigating Lam Soon (Hong Kong)'s past further, check out this free graph covering Lam Soon (Hong Kong)'s past earnings, revenue and cash flow.

What Can We Tell From Lam Soon (Hong Kong)'s ROCE Trend?

In terms of Lam Soon (Hong Kong)'s historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 5.4% from 17% five years ago. However it looks like Lam Soon (Hong Kong) might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

The Key Takeaway

In summary, Lam Soon (Hong Kong) is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors appear hesitant that the trends will pick up because the stock has fallen 36% in the last five years. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

If you'd like to know more about Lam Soon (Hong Kong), we've spotted 2 warning signs, and 1 of them can't be ignored.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com