Returns On Capital Are A Standout For Lexibook – Linguistic Electronic System Société anonyme (EPA:ALLEX)

There are a few key trends to look for if we want to identify the next multi-bagger. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Lexibook – Linguistic Electronic System Société anonyme’s (EPA:ALLEX) returns on capital, so let’s have a look.

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 Lexibook – Linguistic Electronic System Société anonyme is:

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

0.35 = €4.3m ÷ (€28m – €16m) (Based on the trailing twelve months to March 2022).

So, Lexibook – Linguistic Electronic System Société anonyme has an ROCE of 35%. That’s a fantastic return and not only that, it outpaces the average of 11% earned by companies in a similar industry.

Check out the opportunities and risks within the FR Consumer Durables industry.

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’d like to look at how Lexibook – Linguistic Electronic System Société anonyme has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From Lexibook – Linguistic Electronic System Société anonyme’s ROCE Trend?

We’re delighted to see that Lexibook – Linguistic Electronic System Société anonyme is reaping rewards from its investments and is now generating some pre-tax profits. About five years ago the company was generating losses but things have turned around because it’s now earning 35% on its capital. In addition to that, Lexibook – Linguistic Electronic System Société anonyme is employing 103% more capital than previously which is expected of a company that’s trying to break into profitability. This can indicate that there’s plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

In another part of our analysis, we noticed that the company’s ratio of current liabilities to total assets decreased to 56%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. Therefore we can rest assured that the growth in ROCE is a result of the business’ fundamental improvements, rather than a cooking class featuring this company’s books. Nevertheless, there are some potential risks the company is bearing with current liabilities that high, so just keep that in mind.

What We Can Learn From Lexibook – Linguistic Electronic System Société anonyme’s ROCE

To the delight of most shareholders, Lexibook – Linguistic Electronic System Société anonyme has now broken into profitability. Since the stock has only returned 26% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

If you’d like to know more about Lexibook – Linguistic Electronic System Société anonyme, we’ve spotted 4 warning signs, and 2 of them don’t sit too well with us.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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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.