Returns on Capital Paint A Bright Future For Leon Fuat Berhad (KLSE:LEONFB)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. And in light of that, the trends we're seeing at Leon Fuat Berhad's (KLSE:LEONFB) look very promising so lets take a look.

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. The formula for this calculation on Leon Fuat Berhad is:

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

0.27 = RM176m ÷ (RM1.0b - RM402m) (Based on the trailing twelve months to March 2022).

Thus, Leon Fuat Berhad has an ROCE of 27%. In absolute terms that's a great return and it's even better than the Metals and Mining industry average of 13%.

See our latest analysis for Leon Fuat Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for Leon Fuat Berhad's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Leon Fuat Berhad, check out these free graphs here.

How Are Returns Trending?

Investors would be pleased with what's happening at Leon Fuat Berhad. Over the last five years, returns on capital employed have risen substantially to 27%. The amount of capital employed has increased too, by 124%. So we're very much inspired by what we're seeing at Leon Fuat Berhad thanks to its ability to profitably reinvest capital.

Our Take On Leon Fuat Berhad's ROCE

In summary, it's great to see that Leon Fuat Berhad can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And since the stock has fallen 10% over the last five years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.

Leon Fuat Berhad does come with some risks though, we found 5 warning signs in our investment analysis, and 2 of those shouldn't be ignored...

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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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.