Yahoo Finance Some Investors May Be Worried About Lichen China's (NASDAQ:LICN) Returns On Capital
If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Lichen China (NASDAQ:LICN), it didn't seem to tick all of these boxes.
Return On Capital Employed (ROCE): What Is It?
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 Lichen China is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.14 = US$7.7m ÷ (US$56m - US$2.8m) (Based on the trailing twelve months to June 2023).
Thus, Lichen China has an ROCE of 14%. That's a relatively normal return on capital, and it's around the 13% generated by the Professional Services industry.
Check out our latest analysis for Lichen China
Historical performance is a great place to start when researching a stock so above you can see the gauge for Lichen China's ROCE against it's prior returns. If you'd like to look at how Lichen China has performed in the past in other metrics, you can view this free graph of Lichen China's past earnings, revenue and cash flow.
How Are Returns Trending?
In terms of Lichen China's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 36% over the last three years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.
On a side note, Lichen China has done well to pay down its current liabilities to 5.0% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.
What We Can Learn From Lichen China's ROCE
Bringing it all together, while we're somewhat encouraged by Lichen China's reinvestment in its own business, we're aware that returns are shrinking. And investors appear hesitant that the trends will pick up because the stock has fallen 46% in the last year. Therefore based on the analysis done in this article, we don't think Lichen China has the makings of a multi-bagger.
If you want to know some of the risks facing Lichen China we've found 5 warning signs (2 are a bit unpleasant!) that you should be aware of before investing here.
While Lichen China 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
