There are a few key trends to look for if we want to identify the next multi-bagger. In a perfect world, we’d like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don’t think LPP (WSE:LPP) has the makings of a multi-bagger going forward, but let’s have a look at why that may be.
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. Analysts use this formula to calculate it for LPP:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.12 = zł773m ÷ (zł9.6b – zł3.2b) (Based on the trailing twelve months to January 2020).
Thus, LPP has an ROCE of 12%. That’s a relatively normal return on capital, and it’s around the 11% generated by the Luxury industry.
Check out our latest analysis for LPP
In the above chart we have measured LPP’s 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 report on analyst forecasts for the company.
How Are Returns Trending?
On the surface, the trend of ROCE at LPP doesn’t inspire confidence. Around five years ago the returns on capital were 31%, but since then they’ve fallen to 12%. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
What We Can Learn From LPP’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 LPP. Furthermore the stock has climbed 55% over the last five years, it would appear that investors are upbeat about the future. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.
If you want to continue researching LPP, you might be interested to know about the 2 warning signs that our analysis has discovered.
While LPP isn’t earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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This article by Simply Wall St is general in nature. 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.
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