Here's What To Make Of Hong Leong Industries Berhad's (KLSE:HLIND) Decelerating Rates Of Return

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. So, when we ran our eye over Hong Leong Industries Berhad's (KLSE:HLIND) trend of ROCE, we liked what we saw.

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

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Hong Leong Industries Berhad, this is the formula:

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

0.14 = RM286m ÷ (RM2.5b - RM479m) (Based on the trailing twelve months to December 2020).

Therefore, Hong Leong Industries Berhad has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 8.2% generated by the Industrials industry.

See our latest analysis for Hong Leong Industries Berhad

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 Hong Leong Industries Berhad's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Hong Leong Industries Berhad Tell Us?

While the current returns on capital are decent, they haven't changed much. Over the past five years, ROCE has remained relatively flat at around 14% and the business has deployed 41% more capital into its operations. Since 14% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

Our Take On Hong Leong Industries Berhad's ROCE

The main thing to remember is that Hong Leong Industries Berhad has proven its ability to continually reinvest at respectable rates of return. And since the stock has risen strongly over the last five years, it appears the market might expect this trend to continue. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

On a separate note, we've found 2 warning signs for Hong Leong Industries Berhad you'll probably want to know about.

While Hong Leong Industries Berhad 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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