Here’s What’s Happening With Returns At Leader Electronics (TYO:6867)

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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So on that note, Leader Electronics (TYO:6867) looks quite promising in regards to its trends of return on capital.

Return On Capital Employed (ROCE): What is it?

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 Leader Electronics is:

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

0.068 = JP¥327m ÷ (JP¥5.4b - JP¥531m) (Based on the trailing twelve months to September 2020).

Therefore, Leader Electronics has an ROCE of 6.8%. Even though it's in line with the industry average of 7.0%, it's still a low return by itself.

See our latest analysis for Leader Electronics

Historical performance is a great place to start when researching a stock so above you can see the gauge for Leader Electronics' ROCE against it's prior returns. If you'd like to look at how Leader Electronics has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Leader Electronics Tell Us?

Leader Electronics has recently broken into profitability so their prior investments seem to be paying off. About five years ago the company was generating losses but things have turned around because it's now earning 6.8% on its capital. And unsurprisingly, like most companies trying to break into the black, Leader Electronics is utilizing 45% more capital than it was five years ago. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

The Bottom Line On Leader Electronics' ROCE

Long story short, we're delighted to see that Leader Electronics' reinvestment activities have paid off and the company is now profitable. And a remarkable 195% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.

If you'd like to know about the risks facing Leader Electronics, we've discovered 3 warning signs that you should be aware of.

While Leader Electronics 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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