Will The ROCE Trend At Leader Steel Holdings Berhad (KLSE:LSTEEL) Continue?

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Leader Steel Holdings Berhad (KLSE:LSTEEL) and its trend of ROCE, we really liked what we saw.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from 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)

0.012 = RM2.2m ÷ (RM278m - RM102m) (Based on the trailing twelve months to September 2020).

Thus, Leader Steel Holdings Berhad has an ROCE of 1.2%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 2.5%.

View our latest analysis for Leader Steel Holdings Berhad

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'd like to look at how Leader Steel Holdings Berhad has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

The fact that Leader Steel Holdings Berhad is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses five years ago, but now it's earning 1.2% which is a sight for sore eyes. In addition to that, Leader Steel Holdings Berhad is employing 26% more capital than previously which is expected of a company that's trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

What We Can Learn From Leader Steel Holdings Berhad's ROCE

Overall, Leader Steel Holdings Berhad gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. Since the stock has returned a staggering 303% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

On a final note, we found 4 warning signs for Leader Steel Holdings Berhad (1 shouldn't be ignored) you should be aware of.

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. 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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