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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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Leon's Furniture (TSE:LNF), it didn't seem to tick all of these boxes.
Return On Capital Employed (ROCE): What Is It?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Leon's Furniture:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.12 = CA$191m ÷ (CA$2.2b - CA$561m) (Based on the trailing twelve months to June 2024).
Therefore, Leon's Furniture has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 7.1% generated by the Specialty Retail industry.
View our latest analysis for Leon's Furniture
Above you can see how the current ROCE for Leon's Furniture compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Leon's Furniture for free.
So How Is Leon's Furniture's ROCE Trending?
There hasn't been much to report for Leon's Furniture's returns and its level of capital employed because both metrics have been steady for the past five years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So unless we see a substantial change at Leon's Furniture in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger.
What We Can Learn From Leon's Furniture's ROCE
We can conclude that in regards to Leon's Furniture's returns on capital employed and the trends, there isn't much change to report on. Yet to long term shareholders the stock has gifted them an incredible 122% return in the last five years, so the market appears to be rosy about its future. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.