The Trends At Leon Fuat Berhad (KLSE:LEONFB) That You Should Know About

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Leon Fuat Berhad (KLSE:LEONFB) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. To calculate this metric for Leon Fuat Berhad, this is the formula:

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

0.059 = RM26m ÷ (RM715m - RM285m) (Based on the trailing twelve months to September 2020).

Thus, Leon Fuat Berhad has an ROCE of 5.9%. In absolute terms, that's a low return, but it's much better than the Metals and Mining industry average of 3.5%.

Check out 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'd like to look at how Leon Fuat 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 Leon Fuat Berhad Tell Us?

When we looked at the ROCE trend at Leon Fuat Berhad, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 5.9% from 17% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

In Conclusion...

From the above analysis, we find it rather worrisome that returns on capital and sales for Leon Fuat Berhad have fallen, meanwhile the business is employing more capital than it was five years ago. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 62% return. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

Leon Fuat Berhad does have some risks, we noticed 5 warning signs (and 2 which are concerning) we think you should know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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This article by Simply Wall St is general in nature. 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.
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