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If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. Speaking of which, we noticed some great changes in LS telcom's (ETR:LSX) returns on capital, so let's have a look.
What Is Return On Capital Employed (ROCE)?
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. The formula for this calculation on LS telcom is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.058 = €1.6m ÷ (€41m - €14m) (Based on the trailing twelve months to September 2023).
Thus, LS telcom has an ROCE of 5.8%. In absolute terms, that's a low return and it also under-performs the Software industry average of 14%.
Check out our latest analysis for LS telcom
In the above chart we have measured LS telcom's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for LS telcom .
What Does the ROCE Trend For LS telcom Tell Us?
LS telcom has broken into the black (profitability) and we're sure it's a sight for sore eyes. The company now earns 5.8% on its capital, because five years ago it was incurring losses. Interestingly, the capital employed by the business has remained relatively flat, so these higher returns are either from prior investments paying off or increased efficiencies. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. Because in the end, a business can only get so efficient.
The Bottom Line
To bring it all together, LS telcom has done well to increase the returns it's generating from its capital employed. And since the stock has fallen 54% over the last five years, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.
Like most companies, LS telcom does come with some risks, and we've found 1 warning sign that you should be aware of.