LS 2 Holdings (Catalist:ENV) Will Want To Turn Around Its Return Trends

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. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating LS 2 Holdings (Catalist:ENV), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on LS 2 Holdings is:

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

0.044 = S$903k ÷ (S$32m - S$11m) (Based on the trailing twelve months to June 2022).

Therefore, LS 2 Holdings has an ROCE of 4.4%. Ultimately, that's a low return and it under-performs the Commercial Services industry average of 8.8%.

View our latest analysis for LS 2 Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for LS 2 Holdings' ROCE against it's prior returns. If you'd like to look at how LS 2 Holdings has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

On the surface, the trend of ROCE at LS 2 Holdings doesn't inspire confidence. Over the last three years, returns on capital have decreased to 4.4% from 14% three years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, LS 2 Holdings has done well to pay down its current liabilities to 35% 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. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

What We Can Learn From LS 2 Holdings' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that LS 2 Holdings is reinvesting for growth and has higher sales as a result. Despite these promising trends, the stock has collapsed 80% over the last year, so there could be other factors hurting the company's prospects. Regardless, reinvestment can pay off in the long run, so we think astute investors may want to look further into this stock.

LS 2 Holdings does have some risks, we noticed 3 warning signs (and 1 which is concerning) we think you should know about.

While LS 2 Holdings isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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.

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