Liwe Española (BDM:LIW) May Have Issues Allocating Its Capital

If you’re looking for a multi-bagger, there’s a few things to keep an eye out for. Firstly, we’ll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. However, after investigating Liwe Española (BDM:LIW), we don’t think it’s current trends fit the mold of a multi-bagger.

What Is Return On Capital Employed (ROCE)?

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 Liwe Española is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)

0.11 = €13m ÷ (€175m – €61m) (Based on the trailing twelve months to June 2022).

Therefore, Liwe Española has an ROCE of 11%. In absolute terms, that’s a pretty normal return, and it’s somewhat close to the Luxury industry average of 13%.

Check out our latest analysis for Liwe Española

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Liwe Española, check out these free graphs here.

What Does the ROCE Trend For Liwe Española Tell Us?

In terms of Liwe Española’s historical ROCE movements, the trend isn’t fantastic. Around five years ago the returns on capital were 16%, but since then they’ve fallen to 11%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, Liwe Española has done well to pay down its current liabilities to 35% of total assets. That could partly explain why the ROCE has dropped. What’s more, this can reduce some aspects of risk to the business because now the company’s suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business’ efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line On Liwe Española’s ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Liwe Española. And there could be an opportunity here if other metrics look good too, because the stock has declined 36% in the last three years. As a result, we’d recommend researching this stock further to uncover what other fundamentals of the business can show us.

Since virtually every company faces some risks, it’s worth knowing what they are, and we’ve spotted 4 warning signs for Liwe Española (of which 2 are potentially serious!) that you should know about.

While Liwe Española may not currently earn the highest returns, we’ve compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.