Legion Consortium (HKG:2129) Will Be Hoping To Turn Its Returns On Capital Around

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'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Legion Consortium (HKG:2129) and its ROCE trend, we weren't exactly thrilled.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Legion Consortium, this is the formula:

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

0.089 = S$4.8m ÷ (S$65m - S$12m) (Based on the trailing twelve months to December 2022).

Thus, Legion Consortium has an ROCE of 8.9%. On its own, that's a low figure but it's around the 7.6% average generated by the Transportation industry.

View our latest analysis for Legion Consortium

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 Legion Consortium's past further, check out this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

In terms of Legion Consortium's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 8.9% from 31% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

The Bottom Line On Legion Consortium's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Legion Consortium. These growth trends haven't led to growth returns though, since the stock has fallen 22% over the last year. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

Legion Consortium does have some risks, we noticed 2 warning signs (and 1 which is potentially serious) we think you should know about.

While Legion Consortium 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. 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.