There Are Reasons To Feel Uneasy About Legion Consortium's (HKG:2129) Returns On Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Legion Consortium (HKG:2129), it didn't seem to tick all of these boxes.

Understanding 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. The formula for this calculation on Legion Consortium is:

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

0.093 = S$5.5m ÷ (S$70m - S$10m) (Based on the trailing twelve months to June 2023).

So, Legion Consortium has an ROCE of 9.3%. On its own that's a low return, but compared to the average of 5.1% generated by the Transportation industry, it's much better.

See our latest analysis for Legion Consortium

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

The Trend Of ROCE

When we looked at the ROCE trend at Legion Consortium, we didn't gain much confidence. To be more specific, ROCE has fallen from 33% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. 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. However, despite the promising trends, the stock has fallen 34% over the last three years, so there might be an opportunity here for astute investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

If you want to know some of the risks facing Legion Consortium we've found 2 warning signs (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

While Legion Consortium isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.