We Like AJ Lucas Group's (ASX:AJL) Returns And Here's How They're Trending

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in AJ Lucas Group's (ASX:AJL) returns on capital, so let's have a look.

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. To calculate this metric for AJ Lucas Group, this is the formula:

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

0.39 = AU$12m ÷ (AU$107m - AU$76m) (Based on the trailing twelve months to December 2023).

So, AJ Lucas Group has an ROCE of 39%. In absolute terms that's a great return and it's even better than the Construction industry average of 15%.

View our latest analysis for AJ Lucas Group

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're interested in investigating AJ Lucas Group's past further, check out this free graph covering AJ Lucas Group's past earnings, revenue and cash flow.

What Can We Tell From AJ Lucas Group's ROCE Trend?

We're pretty happy with how the ROCE has been trending at AJ Lucas Group. The figures show that over the last five years, returns on capital have grown by 315%. The company is now earning AU$0.4 per dollar of capital employed. In regards to capital employed, AJ Lucas Group appears to been achieving more with less, since the business is using 85% less capital to run its operation. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 71% of its operations, which isn't ideal. And with current liabilities at those levels, that's pretty high.

The Key Takeaway

From what we've seen above, AJ Lucas Group has managed to increase it's returns on capital all the while reducing it's capital base. However the stock is down a substantial 89% in the last five years so there could be other areas of the business hurting its prospects. Still, it's worth doing some further research to see if the trends will continue into the future.

AJ Lucas Group does have some risks, we noticed 4 warning signs (and 3 which are concerning) we think you should know about.

High returns are a key ingredient to strong performance, so check out our free list ofstocks 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com