We Like These Underlying Trends At 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? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at Lambo Group Berhad (KLSE:LAMBO) and its trend of ROCE, we really liked what we saw.

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 ÷ (RM131m - RM2.2m) (Based on the trailing twelve months to May 2020).

Therefore, 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 10%.

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're interested in investigating Lambo Group Berhad's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Lambo Group Berhad's ROCE Trending?

Lambo Group Berhad has recently broken into profitability so their prior investments seem to be paying off. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 6.0% on its capital. And unsurprisingly, like most companies trying to break into the black, Lambo Group Berhad is utilizing 2,040% more capital than it was five years ago. 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. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

Our Take On Lambo Group Berhad's ROCE

To the delight of most shareholders, Lambo Group Berhad has now broken into profitability. Astute investors may have an opportunity here because the stock has declined 69% in the last five years. So researching this company further and determining whether or not these trends will continue seems justified.

One final note, you should learn about the 5 warning signs we've spotted with Lambo Group Berhad (including 2 which are a bit unpleasant) .

While Lambo Group Berhad isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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. 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.
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