These Metrics Don't Make LB Aluminium Berhad (KLSE:LBALUM) Look Too Strong

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. On that note, looking into LB Aluminium Berhad (KLSE:LBALUM), we weren't too upbeat about how things were going.

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. 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).

Therefore, LB Aluminium Berhad has an ROCE of 3.2%. In absolute terms, that's a low return, but it's much better than the Metals and Mining industry average of 2.5%.

Check out our latest analysis for LB Aluminium 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 want to delve into the historical earnings, revenue and cash flow of LB Aluminium Berhad, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

There is reason to be cautious about LB Aluminium Berhad, given the returns are trending downwards. To be more specific, the ROCE was 4.5% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. 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.

The Bottom Line

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 66% 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.

If you want to know some of the risks facing LB Aluminium Berhad we've found 5 warning signs (2 are potentially serious!) that you should be aware of before investing here.

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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