Should You Be Impressed By Latitude Tree Holdings Berhad's (KLSE:LATITUD) 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. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Latitude Tree Holdings Berhad (KLSE:LATITUD) 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. The formula for this calculation on Latitude Tree Holdings Berhad is:

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

0.043 = RM26m ÷ (RM858m - RM241m) (Based on the trailing twelve months to September 2020).

So, Latitude Tree Holdings Berhad has an ROCE of 4.3%. Ultimately, that's a low return and it under-performs the Consumer Durables industry average of 12%.

View our latest analysis for Latitude Tree Holdings 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'd like to look at how Latitude Tree Holdings Berhad has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Latitude Tree Holdings Berhad, we didn't gain much confidence. To be more specific, ROCE has fallen from 17% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

What We Can Learn From Latitude Tree Holdings Berhad's ROCE

Bringing it all together, while we're somewhat encouraged by Latitude Tree Holdings Berhad's reinvestment in its own business, we're aware that returns are shrinking. And investors appear hesitant that the trends will pick up because the stock has fallen 44% in the last five years. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

On a final note, we found 4 warning signs for Latitude Tree Holdings Berhad (1 is concerning) you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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