Stock Analysis

Investors Shouldn't Overlook Locality Planning Energy Holdings' (ASX:LPE) Impressive Returns On Capital

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ASX:LPE
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There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. Speaking of which, we noticed some great changes in Locality Planning Energy Holdings' (ASX:LPE) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

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 Locality Planning Energy Holdings is:

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

0.42 = AU$8.9m ÷ (AU$52m - AU$31m) (Based on the trailing twelve months to June 2022).

Therefore, Locality Planning Energy Holdings has an ROCE of 42%. That's a fantastic return and not only that, it outpaces the average of 5.5% earned by companies in a similar industry.

View our latest analysis for Locality Planning Energy Holdings

roce
ASX:LPE Return on Capital Employed September 4th 2022

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 Locality Planning Energy Holdings' past further, check out this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

We're delighted to see that Locality Planning Energy Holdings is reaping rewards from its investments and is now generating some pre-tax profits. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 42% on its capital. And unsurprisingly, like most companies trying to break into the black, Locality Planning Energy Holdings is utilizing 144% more capital than it was five years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

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. The current liabilities has increased to 59% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

The Bottom Line On Locality Planning Energy Holdings' ROCE

In summary, it's great to see that Locality Planning Energy Holdings has managed to break into profitability and is continuing to reinvest in its business. Although the company may be facing some issues elsewhere since the stock has plunged 95% in the last five years. Still, it's worth doing some further research to see if the trends will continue into the future.

On a separate note, we've found 4 warning signs for Locality Planning Energy Holdings you'll probably want to know about.

Locality Planning Energy Holdings is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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