Does Lambo Group Berhad (KLSE:LAMBO) Have The Makings Of A Multi-Bagger?

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So on that note, Lambo Group Berhad (KLSE:LAMBO) looks quite promising in regards to its trends of return on capital.

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

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Lambo Group Berhad is:

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

0.06 = RM7.8m ÷ (RM133m - RM3.8m) (Based on the trailing twelve months to May 2020).

So, Lambo Group Berhad has an ROCE of 6.0%. In absolute terms, that's a low return and it also under-performs the Software industry average of 7.5%.

See our latest analysis for Lambo Group Berhad

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Lambo Group Berhad, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

Lambo Group Berhad has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 6.0% which is a sight for sore eyes. In addition to that, Lambo Group Berhad is employing 2,040% more capital than previously which is expected of a company that's trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

On a related note, the company's ratio of current liabilities to total assets has decreased to 2.8%, which basically reduces it's funding from the likes of short-term creditors or suppliers. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

What We Can Learn From Lambo Group Berhad's ROCE

In summary, it's great to see that Lambo Group Berhad has managed to break into profitability and is continuing to reinvest in its business. Since the stock has only returned 36% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

Lambo Group Berhad does have some risks, we noticed 5 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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