Returns On Capital At Lii Hen Industries Bhd (KLSE:LIIHEN) Paint A Concerning Picture

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. However, after briefly looking over the numbers, we don't think Lii Hen Industries Bhd (KLSE:LIIHEN) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Lii Hen Industries Bhd:

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

0.052 = RM31m ÷ (RM663m - RM72m) (Based on the trailing twelve months to December 2024).

Therefore, Lii Hen Industries Bhd has an ROCE of 5.2%. Even though it's in line with the industry average of 5.1%, it's still a low return by itself.

View our latest analysis for Lii Hen Industries Bhd

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 Lii Hen Industries Bhd's past further, check out this free graph covering Lii Hen Industries Bhd's past earnings, revenue and cash flow .

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Lii Hen Industries Bhd doesn't inspire confidence. To be more specific, ROCE has fallen from 26% 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.

On a side note, Lii Hen Industries Bhd has done well to pay down its current liabilities to 11% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line On Lii Hen Industries Bhd's ROCE

To conclude, we've found that Lii Hen Industries Bhd is reinvesting in the business, but returns have been falling. Additionally, the stock's total return to shareholders over the last five years has been flat, which isn't too surprising. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

On a final note, we found 4 warning signs for Lii Hen Industries Bhd (1 can't be ignored) you should be aware of.

While Lii Hen Industries Bhd 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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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.