Will Lee & Man Chemical (HKG:746) Multiply In Value Going Forward?

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. With that in mind, the ROCE of Lee & Man Chemical (HKG:746) looks decent, right now, so lets see what the trend of returns can tell us.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its 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)

0.12 = HK$593m ÷ (HK$6.0b - HK$880m) (Based on the trailing twelve months to June 2020).

Therefore, Lee & Man Chemical has an ROCE of 12%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Chemicals industry average of 11%.

See 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 Does the ROCE Trend For Lee & Man Chemical Tell Us?

While the returns on capital are good, they haven't moved much. Over the past five years, ROCE has remained relatively flat at around 12% and the business has deployed 33% more capital into its operations. 12% is a pretty standard return, and it provides some comfort knowing that Lee & Man Chemical has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

The Bottom Line

The main thing to remember is that Lee & Man Chemical has proven its ability to continually reinvest at respectable rates of return. And the stock has done incredibly well with a 102% return over the last five years, so long term investors are no doubt ecstatic with that result. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

One more thing to note, we've identified 2 warning signs with Lee & Man Chemical and understanding these should be part of your investment process.

While Lee & Man Chemical may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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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