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What financial metrics can indicate to us that a company is maturing or even in decline? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. In light of that, from a first glance at LPKF Laser & Electronics (ETR:LPK), we've spotted some signs that it could be struggling, so let's investigate.
What Is Return On Capital Employed (ROCE)?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on LPKF Laser & Electronics is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.024 = €2.2m ÷ (€137m - €44m) (Based on the trailing twelve months to September 2024).
Thus, LPKF Laser & Electronics has an ROCE of 2.4%. Ultimately, that's a low return and it under-performs the Electronic industry average of 9.2%.
Check out 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 .
How Are Returns Trending?
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 20% 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.
In Conclusion...
In summary, it's unfortunate that LPKF Laser & Electronics is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 61% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.
LPKF Laser & Electronics could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for LPK on our platform quite valuable.