Lee & Man Chemical's (HKG:746) Returns On Capital Are Heading Higher

By
Simply Wall St
Published
November 10, 2021
SEHK:746
Source: Shutterstock

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. Speaking of which, we noticed some great changes in Lee & Man Chemical's (HKG:746) returns on capital, so let's have a look.

What is Return On Capital Employed (ROCE)?

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 Lee & Man Chemical is:

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

0.18 = HK$1.0b ÷ (HK$7.2b - HK$1.5b) (Based on the trailing twelve months to June 2021).

So, Lee & Man Chemical has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 12% generated by the Chemicals industry.

Check out our latest analysis for Lee & Man Chemical

roce
SEHK:746 Return on Capital Employed November 11th 2021

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're interested in investigating Lee & Man Chemical's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Lee & Man Chemical's ROCE Trending?

Lee & Man Chemical is displaying some positive trends. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 18%. Basically the business is earning more per dollar of capital invested and in addition to that, 48% 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 On Lee & Man Chemical's ROCE

To sum it up, Lee & Man Chemical has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And a remarkable 381% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

One more thing, we've spotted 2 warning signs facing Lee & Man Chemical that you might find interesting.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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