There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. Although, when we looked at Leader Steel Holdings Berhad (KLSE:LSTEEL), it didn't seem to tick all of these boxes.
Understanding Return On Capital Employed (ROCE)
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. To calculate this metric for Leader Steel Holdings Berhad, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.00073 = RM153k ÷ (RM281m - RM71m) (Based on the trailing twelve months to September 2023).
Therefore, Leader Steel Holdings Berhad has an ROCE of 0.07%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 6.6%.
View our latest analysis for Leader Steel Holdings Berhad
Historical performance is a great place to start when researching a stock so above you can see the gauge for Leader Steel Holdings Berhad's ROCE against it's prior returns. If you're interested in investigating Leader Steel Holdings Berhad's past further, check out this free graph of past earnings, revenue and cash flow.
How Are Returns Trending?
When we looked at the ROCE trend at Leader Steel Holdings Berhad, we didn't gain much confidence. Around five years ago the returns on capital were 9.0%, but since then they've fallen to 0.07%. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.
On a related note, Leader Steel Holdings Berhad has decreased its current liabilities to 25% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.