What Do The Returns At Lycopodium (ASX:LYL) Mean Going Forward?

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. 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 Lycopodium's (ASX:LYL) 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 Lycopodium, this is the formula:

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

0.17 = AU$14m ÷ (AU$156m - AU$76m) (Based on the trailing twelve months to June 2020).

So, Lycopodium has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 14% generated by the Construction industry.

Check out our latest analysis for Lycopodium

Above you can see how the current ROCE for Lycopodium compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Lycopodium.

What The Trend Of ROCE Can Tell Us

We're delighted to see that Lycopodium is reaping rewards from its investments and is now generating some pre-tax profits. About five years ago the company was generating losses but things have turned around because it's now earning 17% on its capital. And unsurprisingly, like most companies trying to break into the black, Lycopodium is utilizing 25% more capital than it was five years ago. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

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. Effectively this means that suppliers or short-term creditors are now funding 49% of the business, which is more than it was five years ago. And with current liabilities at those levels, that's pretty high.

The Bottom Line On Lycopodium's ROCE

To the delight of most shareholders, Lycopodium has now broken into profitability. Since the stock has returned a staggering 385% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

On a separate note, we've found 3 warning signs for Lycopodium you'll probably want to know about.

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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