Lambo Group Berhad (KLSE:LAMBO) Is Experiencing Growth In Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in Lambo Group Berhad's (KLSE:LAMBO) returns on capital, so let's have a 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)

0.06 = RM7.8m ÷ (RM131m - RM2.2m) (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 11%.

View 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.

The Trend Of ROCE

The fact that Lambo Group 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 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 indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 1.7%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. 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.

Our Take On Lambo Group Berhad's ROCE

Overall, Lambo Group 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. And since the stock has dived 78% over the last five years, there may be other factors affecting the company's prospects. In any case, we believe the economic trends of this company are positive and looking into the stock further could prove rewarding.

Lambo Group Berhad does have some risks, we noticed 6 warning signs (and 2 which make us uncomfortable) 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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