Has Lotus Bakeries (EBR:LOTB) Got What It Takes To Become A Multi-Bagger?

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. That's why when we briefly looked at Lotus Bakeries' (EBR:LOTB) ROCE trend, we were pretty happy with what we saw.

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. The formula for this calculation on Lotus Bakeries is:

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

0.16 = €107m ÷ (€848m - €164m) (Based on the trailing twelve months to June 2020).

Thus, Lotus Bakeries has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the Food industry average of 7.5% it's much better.

Check out our latest analysis for Lotus Bakeries

Above you can see how the current ROCE for Lotus Bakeries compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Can We Tell From Lotus Bakeries' ROCE Trend?

While the current returns on capital are decent, they haven't changed much. The company has consistently earned 16% for the last five years, and the capital employed within the business has risen 132% in that time. Since 16% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

In Conclusion...

The main thing to remember is that Lotus Bakeries has proven its ability to continually reinvest at respectable rates of return. And the stock has done incredibly well with a 108% return over the last five years, so long term investors are no doubt ecstatic with that result. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.

Lotus Bakeries does have some risks though, and we've spotted 1 warning sign for Lotus Bakeries that you might be interested in.

While Lotus Bakeries 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. 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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