Yahoo Finance There's Been No Shortage Of Growth Recently For Lucapa Diamond's (ASX:LOM) Returns On Capital
If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Lucapa Diamond (ASX:LOM) and its trend of ROCE, we really liked what we saw.
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 Lucapa Diamond is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.058 = US$5.3m ÷ (US$101m - US$8.9m) (Based on the trailing twelve months to June 2023).
Thus, Lucapa Diamond has an ROCE of 5.8%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 9.0%.
View our latest analysis for Lucapa Diamond
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 Lucapa Diamond, check out these free graphs here.
What Does the ROCE Trend For Lucapa Diamond Tell Us?
Shareholders will be relieved that Lucapa Diamond has broken into profitability. The company now earns 5.8% on its capital, because five years ago it was incurring losses. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. Because in the end, a business can only get so efficient.
In Conclusion...
To sum it up, Lucapa Diamond is collecting higher returns from the same amount of capital, and that's impressive. Although the company may be facing some issues elsewhere since the stock has plunged 84% in the last five years. In any case, we believe the economic trends of this company are positive and looking into the stock further could prove rewarding.
One more thing to note, we've identified 2 warning signs with Lucapa Diamond and understanding them should be part of your investment process.
While Lucapa Diamond 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.
