LYC Healthcare Berhad's (KLSE:LYC) Returns On Capital Are Heading Higher

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So on that note, LYC Healthcare Berhad (KLSE:LYC) looks quite promising in regards to its trends of return on capital.

Understanding 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 LYC Healthcare Berhad is:

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

0.051 = RM9.3m ÷ (RM208m - RM24m) (Based on the trailing twelve months to September 2022).

So, LYC Healthcare Berhad has an ROCE of 5.1%. In absolute terms, that's a low return and it also under-performs the IT industry average of 12%.

Check out our latest analysis for LYC Healthcare 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 LYC Healthcare Berhad's past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

We're delighted to see that LYC Healthcare Berhad is reaping rewards from its investments and is now generating some pre-tax profits. About five years ago the company was generating losses but things have turned around because it's now earning 5.1% on its capital. Not only that, but the company is utilizing 1,026% more capital than before, but that's to be expected from a company trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

One more thing to note, LYC Healthcare Berhad has decreased current liabilities to 12% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

The Key Takeaway

To the delight of most shareholders, LYC Healthcare Berhad has now broken into profitability. Astute investors may have an opportunity here because the stock has declined 42% in the last five years. So researching this company further and determining whether or not these trends will continue seems justified.

One more thing: We've identified 4 warning signs with LYC Healthcare Berhad (at least 2 which don't sit too well with us) , and understanding them would certainly be useful.

While LYC Healthcare 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. 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.