Returns On Capital Signal Tricky Times Ahead For Lambo Group Berhad (KLSE:LAMBO)

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. However, after briefly looking over the numbers, we don't think Lambo Group Berhad (KLSE:LAMBO) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is Return On Capital Employed (ROCE)?

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. The formula for this calculation on Lambo Group Berhad is:

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

0.022 = RM3.7m ÷ (RM172m - RM5.1m) (Based on the trailing twelve months to June 2024).

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 11%.

View 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 , check out these free graphs detailing revenue and cash flow performance of Lambo Group Berhad.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Lambo Group Berhad doesn't inspire confidence. Over the last five years, returns on capital have decreased to 2.2% from 17% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

What We Can Learn From Lambo Group Berhad's ROCE

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 99% 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.

Like most companies, Lambo Group Berhad does come with some risks, and we've found 4 warning signs that you should be aware of.

While Lambo Group Berhad may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.