What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at Lontrue (SZSE:300175) and its trend of ROCE, we really liked what we saw.
What Is Return On Capital Employed (ROCE)?
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. Analysts use this formula to calculate it for Lontrue:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.043 = CN¥22m ÷ (CN¥658m - CN¥154m) (Based on the trailing twelve months to March 2024).
Thus, Lontrue has an ROCE of 4.3%. Ultimately, that's a low return and it under-performs the Food industry average of 8.0%.
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'd like to look at how Lontrue has performed in the past in other metrics, you can view this free graph of Lontrue's past earnings, revenue and cash flow.
How Are Returns Trending?
While the ROCE is still rather low for Lontrue, we're glad to see it heading in the right direction. The figures show that over the last five years, returns on capital have grown by 82%. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. Speaking of capital employed, the company is actually utilizing 51% less than it was five years ago, which can be indicative of a business that's improving its efficiency. Lontrue may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.
What We Can Learn From Lontrue's ROCE
In the end, Lontrue has proven it's capital allocation skills are good with those higher returns from less amount of capital. Since the total return from the stock has been almost flat over the last five years, there might be an opportunity here if the valuation looks good. With that in mind, we believe the promising trends warrant this stock for further investigation.
Lontrue does have some risks though, and we've spotted 2 warning signs for Lontrue that you might be interested in.
While Lontrue 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. 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.