Some Investors May Be Worried About Lumibird's (EPA:LBIRD) 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? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Having said that, from a first glance at Lumibird (EPA:LBIRD) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Lumibird, this is the formula:

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

0.037 = €12m ÷ (€405m - €74m) (Based on the trailing twelve months to December 2023).

Therefore, Lumibird has an ROCE of 3.7%. Ultimately, that's a low return and it under-performs the Electronic industry average of 7.3%.

View our latest analysis for Lumibird

In the above chart we have measured Lumibird's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Lumibird .

What Does the ROCE Trend For Lumibird Tell Us?

On the surface, the trend of ROCE at Lumibird doesn't inspire confidence. To be more specific, ROCE has fallen from 9.8% over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

In Conclusion...

To conclude, we've found that Lumibird is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 22% in the last five years. Therefore based on the analysis done in this article, we don't think Lumibird has the makings of a multi-bagger.

One final note, you should learn about the 2 warning signs we've spotted with Lumibird (including 1 which doesn't sit too well with us) .

While Lumibird 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.