Will The ROCE Trend At AJ Lucas Group (ASX:AJL) Continue?

What are the early trends we should look for to identify a stock that could multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in AJ Lucas Group's (ASX:AJL) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

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. Analysts use this formula to calculate it for AJ Lucas Group:

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

0.10 = AU$18m ÷ (AU$239m - AU$64m) (Based on the trailing twelve months to June 2020).

So, AJ Lucas Group has an ROCE of 10%. In absolute terms, that's a pretty standard return but compared to the Construction industry average it falls behind.

Check out our latest analysis for AJ Lucas Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for AJ Lucas Group's ROCE against it's prior returns. If you'd like to look at how AJ Lucas Group 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?

Shareholders will be relieved that AJ Lucas Group has broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 10% on its capital. While returns have increased, the amount of capital employed by AJ Lucas Group has remained flat over the period. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.

The Bottom Line On AJ Lucas Group's ROCE

To bring it all together, AJ Lucas Group has done well to increase the returns it's generating from its capital employed. However the stock is down a substantial 81% in the last five years so there could be other areas of the business hurting its prospects. In any case, we believe the economic trends of this company are positive and looking into the stock further could prove rewarding.

One final note, you should learn about the 4 warning signs we've spotted with AJ Lucas Group (including 1 which is is a bit unpleasant) .

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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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