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If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, Lords Group Trading (LON:LORD) looks quite promising in regards to its trends of return on capital.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Lords Group Trading:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.14 = UK£13m ÷ (UK£172m - UK£80m) (Based on the trailing twelve months to December 2021).
Therefore, Lords Group Trading has an ROCE of 14%. By itself that's a normal return on capital and it's in line with the industry's average returns of 14%.
Check out our latest analysis for Lords Group Trading
Above you can see how the current ROCE for Lords Group Trading compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What Does the ROCE Trend For Lords Group Trading Tell Us?
Lords Group Trading is displaying some positive trends. The numbers show that in the last three years, the returns generated on capital employed have grown considerably to 14%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 496%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.
One more thing to note, Lords Group Trading has decreased current liabilities to 47% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. This tells us that Lords Group Trading has grown its returns without a reliance on increasing their current liabilities, which we're very happy with. However, current liabilities are still at a pretty high level, so just be aware that this can bring with it some risks.
The Bottom Line On Lords Group Trading's ROCE
To sum it up, Lords Group Trading has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And since the stock has fallen 29% over the last year, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.