LB Aluminium Berhad's (KLSE:LBALUM) Returns On Capital Not Reflecting Well On The Business

When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. So after glancing at the trends within LB Aluminium Berhad (KLSE:LBALUM), we weren't too hopeful.

What is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on LB Aluminium Berhad is:

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

0.032 = RM12m ÷ (RM579m - RM216m) (Based on the trailing twelve months to October 2020).

Thus, LB Aluminium Berhad has an ROCE of 3.2%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 5.0%.

Check out our latest analysis for LB Aluminium Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for LB Aluminium Berhad's ROCE against it's prior returns. If you'd like to look at how LB Aluminium Berhad has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is LB Aluminium Berhad's ROCE Trending?

There is reason to be cautious about LB Aluminium Berhad, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 4.5% that they were earning five years ago. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on LB Aluminium Berhad becoming one if things continue as they have.

What We Can Learn From LB Aluminium Berhad's ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. However the stock has delivered a 57% return to shareholders over the last five years, so investors might be expecting the trends to turn around. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

One more thing: We've identified 4 warning signs with LB Aluminium Berhad (at least 2 which can't be ignored) , and understanding these would certainly be useful.

While LB Aluminium 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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