Yahoo Finance Lindsay Australia's (ASX:LAU) Returns Have Hit A Wall
Did you know there are some financial metrics that can provide clues of a potential 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Lindsay Australia (ASX:LAU) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
Return On Capital Employed (ROCE): What is it?
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. To calculate this metric for Lindsay Australia, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.056 = AU$16m ÷ (AU$395m - AU$114m) (Based on the trailing twelve months to December 2021).
Thus, Lindsay Australia has an ROCE of 5.6%. On its own that's a low return on capital but it's in line with the industry's average returns of 6.4%.
View our latest analysis for Lindsay Australia
In the above chart we have measured Lindsay Australia's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Lindsay Australia here for free.
What The Trend Of ROCE Can Tell Us
There are better returns on capital out there than what we're seeing at Lindsay Australia. The company has employed 57% more capital in the last five years, and the returns on that capital have remained stable at 5.6%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.
In Conclusion...
As we've seen above, Lindsay Australia's returns on capital haven't increased but it is reinvesting in the business. Since the stock has gained an impressive 43% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.
On a separate note, we've found 3 warning signs for Lindsay Australia you'll probably want to know about.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and 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.
