Returns On Capital At Lee Swee Kiat Group Berhad (KLSE:LEESK) Have Hit The Brakes

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. That's why when we briefly looked at Lee Swee Kiat Group Berhad's (KLSE:LEESK) ROCE trend, we were pretty happy with what we saw.

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. Analysts use this formula to calculate it for Lee Swee Kiat Group Berhad:

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

0.13 = RM8.5m ÷ (RM95m - RM29m) (Based on the trailing twelve months to December 2020).

So, Lee Swee Kiat Group Berhad has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 9.9% generated by the Consumer Durables industry.

Check out our latest analysis for Lee Swee Kiat Group Berhad

Above you can see how the current ROCE for Lee Swee Kiat Group Berhad compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Lee Swee Kiat Group Berhad.

What The Trend Of ROCE Can Tell Us

While the current returns on capital are decent, they haven't changed much. The company has consistently earned 13% for the last five years, and the capital employed within the business has risen 34% in that time. 13% is a pretty standard return, and it provides some comfort knowing that Lee Swee Kiat Group Berhad has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

What We Can Learn From Lee Swee Kiat Group Berhad's ROCE

In the end, Lee Swee Kiat Group Berhad has proven its ability to adequately reinvest capital at good rates of return. And the stock has done incredibly well with a 272% return over the last five years, so long term investors are no doubt ecstatic with that result. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.

One more thing to note, we've identified 2 warning signs with Lee Swee Kiat Group Berhad and understanding these should be part of your investment process.

While Lee Swee Kiat Group Berhad may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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This article by Simply Wall St is general in nature. 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.
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