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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Leader Steel Holdings Berhad (KLSE:LSTEEL) and its ROCE trend, we weren't exactly thrilled.
Understanding Return On Capital Employed (ROCE)
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 Leader Steel Holdings Berhad, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.001 = RM221k ÷ (RM299m - RM88m) (Based on the trailing twelve months to June 2023).
Therefore, Leader Steel Holdings Berhad has an ROCE of 0.1%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 8.1%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Leader Steel Holdings Berhad's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Leader Steel Holdings Berhad, check out these free graphs here.
The Trend Of ROCE
When we looked at the ROCE trend at Leader Steel Holdings Berhad, we didn't gain much confidence. To be more specific, ROCE has fallen from 8.7% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.
On a related note, Leader Steel Holdings Berhad has decreased its current liabilities to 29% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.
What We Can Learn From Leader Steel Holdings Berhad's ROCE
In summary, Leader Steel Holdings Berhad is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has gained an impressive 50% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.
One more thing, we've spotted 4 warning signs facing Leader Steel Holdings Berhad that you might find interesting.
While Leader Steel Holdings 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. 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.
Leader Steel Holdings Berhad
Leader Steel Holdings Berhad, an investment holding company, manufactures, processes, and trades in steel and metal products, and minerals in Malaysia, China, and internationally.
Adequate balance sheet and slightly overvalued.