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. This shows us that it’s a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So on that note, Lion Asiapac (SGX:BAZ) looks quite promising in regards to its trends of return on capital.
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. Analysts use this formula to calculate it for Lion Asiapac:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.0065 = S$394k ÷ (S$70m – S$9.5m) (Based on the trailing twelve months to March 2024).
So, Lion Asiapac has an ROCE of 0.7%. In absolute terms, that’s a low return and it also under-performs the Basic Materials industry average of 7.7%.
Check out our latest analysis for Lion Asiapac
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 Lion Asiapac’s past further, check out this free graph covering Lion Asiapac’s past earnings, revenue and cash flow.
How Are Returns Trending?
It’s nice to see that ROCE is headed in the right direction, even if it is still relatively low. The figures show that over the last five years, returns on capital have grown by 432%. That’s a very favorable trend because this means that the company is earning more per dollar of capital that’s being employed. Speaking of capital employed, the company is actually utilizing 24% less than it was five years ago, which can be indicative of a business that’s improving its efficiency. Lion Asiapac may be selling some assets so it’s worth investigating if the business has plans for future investments to increase returns further still.
The Key Takeaway
In the end, Lion Asiapac has proven it’s capital allocation skills are good with those higher returns from less amount of capital. Astute investors may have an opportunity here because the stock has declined 10% in the last five years. That being the case, research into the company’s current valuation metrics and future prospects seems fitting.
Since virtually every company faces some risks, it’s worth knowing what they are, and we’ve spotted 3 warning signs for Lion Asiapac (of which 2 are significant!) that you should know about.
While Lion Asiapac 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.
