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If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. So after we looked into LPKF Laser & Electronics (ETR:LPK), the trends above didn't look too great.
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. Analysts use this formula to calculate it for LPKF Laser & Electronics:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.063 = €6.0m ÷ (€139m - €44m) (Based on the trailing twelve months to June 2024).
So, LPKF Laser & Electronics has an ROCE of 6.3%. Ultimately, that's a low return and it under-performs the Electronic industry average of 10%.
See our latest analysis for LPKF Laser & Electronics
In the above chart we have measured LPKF Laser & Electronics' 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 LPKF Laser & Electronics .
What Does the ROCE Trend For LPKF Laser & Electronics Tell Us?
We are a bit worried about the trend of returns on capital at LPKF Laser & Electronics. Unfortunately the returns on capital have diminished from the 18% that they were earning five years ago. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect LPKF Laser & Electronics to turn into a multi-bagger.
While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 32%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 6.3%. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.
Our Take On LPKF Laser & Electronics' ROCE
All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. It should come as no surprise then that the stock has fallen 30% over the last five years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.