Do You Know About Lambo Group Berhad’s (KLSE:LAMBO) ROCE?

Today we are going to look at Lambo Group Berhad (KLSE:LAMBO) to see whether it might be an attractive investment prospect. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.

First up, we'll look at what ROCE is and how we calculate it. Next, we'll compare it to others in its industry. And finally, we'll look at how its current liabilities are impacting its ROCE.

What is Return On Capital Employed (ROCE)?

ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Generally speaking a higher ROCE is better. Ultimately, it is a useful but imperfect metric. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.

So, How Do We Calculate ROCE?

Analysts use this formula to calculate return on capital employed:

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

Or for Lambo Group Berhad:

0.12 = RM15m ÷ (RM124m - RM1.5m) (Based on the trailing twelve months to December 2019.)

Therefore, Lambo Group Berhad has an ROCE of 12%.

View our latest analysis for Lambo Group Berhad

Does Lambo Group Berhad Have A Good ROCE?

One way to assess ROCE is to compare similar companies. It appears that Lambo Group Berhad's ROCE is fairly close to the Software industry average of 11%. Separate from Lambo Group Berhad's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.

Our data shows that Lambo Group Berhad currently has an ROCE of 12%, compared to its ROCE of 3.0% 3 years ago. This makes us think about whether the company has been reinvesting shrewdly. The image below shows how Lambo Group Berhad's ROCE compares to its industry, and you can click it to see more detail on its past growth.

It is important to remember that ROCE shows past performance, and is not necessarily predictive. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. You can check if Lambo Group Berhad has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.

Do Lambo Group Berhad's Current Liabilities Skew Its ROCE?

Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that need to be paid within 12 months. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To counteract this, we check if a company has high current liabilities, relative to its total assets.

Lambo Group Berhad has total assets of RM124m and current liabilities of RM1.5m. As a result, its current liabilities are equal to approximately 1.2% of its total assets. With low current liabilities, Lambo Group Berhad's decent ROCE looks that much more respectable.

Our Take On Lambo Group Berhad's ROCE

If Lambo Group Berhad can continue reinvesting in its business, it could be an attractive prospect. There might be better investments than Lambo Group Berhad out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.

If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.