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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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Lindblad Expeditions Holdings (NASDAQ:LIND), we don't think it's current trends fit the mold of a multi-bagger.
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 Lindblad Expeditions Holdings is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.03 = US$15m ÷ (US$890m - US$386m) (Based on the trailing twelve months to September 2024).
Therefore, Lindblad Expeditions Holdings has an ROCE of 3.0%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 9.3%.
See our latest analysis for Lindblad Expeditions Holdings
In the above chart we have measured Lindblad Expeditions Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Lindblad Expeditions Holdings for free.
What Can We Tell From Lindblad Expeditions Holdings' ROCE Trend?
When we looked at the ROCE trend at Lindblad Expeditions Holdings, we didn't gain much confidence. To be more specific, ROCE has fallen from 8.3% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 43%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 3.0%. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.
What We Can Learn From Lindblad Expeditions Holdings' ROCE
In summary, despite lower returns in the short term, we're encouraged to see that Lindblad Expeditions Holdings is reinvesting for growth and has higher sales as a result. These trends don't appear to have influenced returns though, because the total return from the stock has been mostly flat over the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.