Lion Posim Berhad (KLSE:LIONPSIM) Might Have The Makings Of A Multi-Bagger

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Lion Posim Berhad's (KLSE:LIONPSIM) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Lion Posim Berhad:

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

0.0079 = RM5.8m ÷ (RM871m - RM129m) (Based on the trailing twelve months to December 2021).

So, Lion Posim Berhad has an ROCE of 0.8%. In absolute terms, that's a low return and it also under-performs the Trade Distributors industry average of 9.0%.

Check out our latest analysis for Lion Posim Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for Lion Posim Berhad's ROCE against it's prior returns. If you're interested in investigating Lion Posim Berhad's past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

The fact that Lion Posim Berhad is now generating some pre-tax profits from its prior investments is very encouraging. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 0.8% on its capital. In addition to that, Lion Posim Berhad is employing 41% more capital than previously which is expected of a company that's trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

The Key Takeaway

Long story short, we're delighted to see that Lion Posim Berhad's reinvestment activities have paid off and the company is now profitable. And since the stock has fallen 30% over the last five years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.

If you want to know some of the risks facing Lion Posim Berhad we've found 5 warning signs (2 are significant!) that you should be aware of before investing here.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.