Investors Could Be Concerned With Lambo Group Berhad's (KLSE:LAMBO) Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. Having said that, from a first glance at Lambo Group Berhad (KLSE:LAMBO) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What Is It?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Lambo Group Berhad:

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

0.022 = RM3.8m ÷ (RM177m - RM3.9m) (Based on the trailing twelve months to September 2023).

Thus, Lambo Group Berhad has an ROCE of 2.2%. In absolute terms, that's a low return and it also under-performs the Software industry average of 9.3%.

Check out our latest analysis for Lambo Group Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for Lambo Group Berhad's ROCE against it's prior returns. If you're interested in investigating Lambo Group Berhad's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Lambo Group Berhad's ROCE Trend?

In terms of Lambo Group Berhad's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 20% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

In Conclusion...

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Lambo Group Berhad. Despite these promising trends, the stock has collapsed 98% over the last five years, so there could be other factors hurting the company's prospects. Regardless, reinvestment can pay off in the long run, so we think astute investors may want to look further into this stock.

Lambo Group Berhad does have some risks, we noticed 3 warning signs (and 2 which are a bit concerning) 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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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.