Will Leon Fuat Berhad (KLSE:LEONFB) Multiply In Value Going Forward?

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Leon Fuat Berhad (KLSE:LEONFB) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its 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)

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

Thus, Leon Fuat Berhad has an ROCE of 6.0%. On its own that's a low return, but compared to the average of 3.1% generated by the Metals and Mining industry, it's much better.

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're interested in investigating Leon Fuat Berhad's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Leon Fuat Berhad Tell Us?

In terms of Leon Fuat Berhad's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 17%, but since then they've fallen to 6.0%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

The Key Takeaway

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. Despite the concerning underlying trends, the stock has actually gained 10% over the last five years, so it might be that the investors are expecting the trends to reverse. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

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

While Leon Fuat 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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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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