What are the early trends we should look for to identify a stock that could multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So on that note, Locality Planning Energy Holdings (ASX:LPE) looks quite promising in regards to its trends of return on capital.
What is Return On Capital Employed (ROCE)?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its 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)
0.15 = AU$2.5m ÷ (AU$29m - AU$13m) (Based on the trailing twelve months to June 2021).
Therefore, Locality Planning Energy Holdings has an ROCE of 15%. In absolute terms, that's a satisfactory return, but compared to the Electric Utilities industry average of 6.1% it's much better.
In the above chart we have measured Locality Planning Energy Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What The Trend Of ROCE Can Tell Us
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 15% on its capital. And unsurprisingly, like most companies trying to break into the black, Locality Planning Energy Holdings is utilizing 262% more capital than it was five years ago. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.
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 44% of its operations, which isn't ideal. And with current liabilities at those levels, that's pretty high.
The Bottom Line
To the delight of most shareholders, Locality Planning Energy Holdings has now broken into profitability. And since the stock has dived 87% over the last five years, there may be other factors affecting the company's prospects. In any case, we believe the economic trends of this company are positive and looking into the stock further could prove rewarding.
On a final note, we found 6 warning signs for Locality Planning Energy Holdings (4 make us uncomfortable) you should be aware of.
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. 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.
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Locality Planning Energy Holdings
Locality Planning Energy Holdings Limited provides electricity and utility services to residential and commercial customers throughout the Australian National Electricity Market.
Solid track record with mediocre balance sheet.