Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Leo Group (SZSE:002131), it didn't seem to tick all of these boxes.
Return On Capital Employed (ROCE): What Is It?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Leo Group, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.016 = CN¥263m ÷ (CN¥24b - CN¥7.2b) (Based on the trailing twelve months to September 2023).
So, Leo Group has an ROCE of 1.6%. Ultimately, that's a low return and it under-performs the Media industry average of 4.9%.
Check out our latest analysis for Leo Group
Historical performance is a great place to start when researching a stock so above you can see the gauge for Leo Group's ROCE against it's prior returns. If you're interested in investigating Leo Group's past further, check out this free graph of past earnings, revenue and cash flow.
What The Trend Of ROCE Can Tell Us
In terms of Leo Group's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 6.4%, but since then they've fallen to 1.6%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.
The Bottom Line
To conclude, we've found that Leo Group is reinvesting in the business, but returns have been falling. And with the stock having returned a mere 30% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.
On a final note, we've found 1 warning sign for Leo Group that we think you should be aware of.
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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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.