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What are the early trends we should look for to identify a stock that could multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So, when we ran our eye over Linamar's (TSE:LNR) trend of ROCE, we liked what we saw.
Return On Capital Employed (ROCE): What Is It?
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 Linamar is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.11 = CA$939m ÷ (CA$11b - CA$2.6b) (Based on the trailing twelve months to September 2024).
Therefore, Linamar has an ROCE of 11%. That's a relatively normal return on capital, and it's around the 10% generated by the Auto Components industry.
See our latest analysis for Linamar
In the above chart we have measured Linamar's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Linamar .
How Are Returns Trending?
While the current returns on capital are decent, they haven't changed much. The company has employed 29% more capital in the last five years, and the returns on that capital have remained stable at 11%. Since 11% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.
The Key Takeaway
In the end, Linamar has proven its ability to adequately reinvest capital at good rates of return. However, over the last five years, the stock has only delivered a 38% return to shareholders who held over that period. So to determine if Linamar is a multi-bagger going forward, we'd suggest digging deeper into the company's other fundamentals.
Linamar could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for LNR on our platform quite valuable.
While Linamar 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.