Lingbao Gold Group (HKG:3330) Knows How To Allocate Capital Effectively

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at the ROCE trend of Lingbao Gold Group (HKG:3330) we really liked what we saw.

Return On Capital Employed (ROCE): What is it?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Lingbao Gold Group, this is the formula:

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

0.21 = CN¥380m ÷ (CN¥6.7b - CN¥4.9b) (Based on the trailing twelve months to December 2020).

Thus, Lingbao Gold Group has an ROCE of 21%. In absolute terms that's a great return and it's even better than the Metals and Mining industry average of 8.0%.

View our latest analysis for Lingbao Gold Group

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Lingbao Gold Group, check out these free graphs here.

So How Is Lingbao Gold Group's ROCE Trending?

Lingbao Gold Group is showing promise given that its ROCE is trending up and to the right. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 2,165% over the last five years. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

Another thing to note, Lingbao Gold Group has a high ratio of current liabilities to total assets of 73%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On Lingbao Gold Group's ROCE

To bring it all together, Lingbao Gold Group has done well to increase the returns it's generating from its capital employed. Given the stock has declined 17% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. So researching this company further and determining whether or not these trends will continue seems justified.

Lingbao Gold Group does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is a bit unpleasant...

Lingbao Gold Group 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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