Should We Be Excited About The Trends Of Returns At Lee & Man Chemical (HKG:746)?

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think Lee & Man Chemical (HKG:746) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Lee & Man Chemical:

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

0.099 = HK$553m ÷ (HK$6.8b - HK$1.2b) (Based on the trailing twelve months to December 2020).

So, Lee & Man Chemical has an ROCE of 9.9%. Even though it's in line with the industry average of 9.9%, it's still a low return by itself.

View our latest analysis for Lee & Man Chemical

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

What Can We Tell From Lee & Man Chemical's ROCE Trend?

The returns on capital haven't changed much for Lee & Man Chemical in recent years. The company has consistently earned 9.9% for the last five years, and the capital employed within the business has risen 53% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

The Bottom Line

In summary, Lee & Man Chemical has simply been reinvesting capital and generating the same low rate of return as before. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 140% gain to shareholders who have held over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Like most companies, Lee & Man Chemical does come with some risks, and we've found 2 warning signs that you should be aware of.

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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