Capital Allocation Trends At Lysaght Galvanized Steel Berhad (KLSE:LYSAGHT) Aren't Ideal

There are a few key trends to look for if we want to identify the next multi-bagger. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Lysaght Galvanized Steel Berhad (KLSE:LYSAGHT), it didn't seem to tick all of these boxes.

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. Analysts use this formula to calculate it for Lysaght Galvanized Steel Berhad:

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

0.0027 = RM416k ÷ (RM162m - RM5.6m) (Based on the trailing twelve months to December 2020).

Thus, Lysaght Galvanized Steel Berhad has an ROCE of 0.3%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 5.7%.

Check out our latest analysis for Lysaght Galvanized Steel Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for Lysaght Galvanized Steel Berhad's ROCE against it's prior returns. If you'd like to look at how Lysaght Galvanized Steel Berhad has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From Lysaght Galvanized Steel Berhad's ROCE Trend?

When we looked at the ROCE trend at Lysaght Galvanized Steel Berhad, we didn't gain much confidence. To be more specific, ROCE has fallen from 11% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. 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 Bottom Line On Lysaght Galvanized Steel Berhad's ROCE

In summary, we're somewhat concerned by Lysaght Galvanized Steel Berhad's diminishing returns on increasing amounts of capital. It should come as no surprise then that the stock has fallen 34% over the last five years, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

If you'd like to know more about Lysaght Galvanized Steel Berhad, we've spotted 3 warning signs, and 1 of them is significant.

While Lysaght Galvanized Steel 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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