Capital Allocation Trends At Lay Hong Berhad (KLSE:LAYHONG) Aren't Ideal

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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 investigating Lay Hong Berhad (KLSE:LAYHONG), we don't think it's current trends fit the mold of a multi-bagger.

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

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. To calculate this metric for Lay Hong Berhad, this is the formula:

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

0.044 = RM27m ÷ (RM952m - RM343m) (Based on the trailing twelve months to March 2021).

Therefore, Lay Hong Berhad has an ROCE of 4.4%. In absolute terms, that's a low return and it also under-performs the Food industry average of 7.4%.

View our latest analysis for Lay Hong 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 Lay Hong Berhad has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Lay Hong Berhad Tell Us?

When we looked at the ROCE trend at Lay Hong Berhad, we didn't gain much confidence. To be more specific, ROCE has fallen from 8.7% over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line On Lay Hong Berhad's ROCE

To conclude, we've found that Lay Hong Berhad is reinvesting in the business, but returns have been falling. Since the stock has declined 63% over the last five years, investors may not be too optimistic on this trend improving either. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

If you want to know some of the risks facing Lay Hong Berhad we've found 3 warning signs (2 don't sit too well with us!) that you should be aware of before investing here.

While Lay Hong 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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