Returns On Capital Are A Standout For Locality Planning Energy Holdings (ASX:LPE)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. With that in mind, the ROCE of Locality Planning Energy Holdings (ASX:LPE) looks great, so lets see what the trend can tell us.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the 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)

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

So, Locality Planning Energy Holdings has an ROCE of 42%. In absolute terms that's a great return and it's even better than the Electric Utilities industry average of 5.5%.

See our latest analysis for Locality Planning Energy Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Locality Planning Energy Holdings' ROCE against it's prior returns. If you're interested in investigating Locality Planning Energy Holdings' past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Locality Planning Energy Holdings' ROCE Trend?

The fact that Locality Planning Energy Holdings is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses five years ago, but now it's earning 42% which is a sight for sore eyes. In addition to that, Locality Planning Energy Holdings is employing 143% more capital than previously which is expected of a company that's trying to break into profitability. 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 59% of its operations, which isn't ideal. 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 Key Takeaway

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. And since the stock has dived 95% over the last five years, there may be other factors affecting the company's prospects. Regardless, we think the underlying fundamentals warrant this stock for further investigation.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 6 warning signs for Locality Planning Energy Holdings (of which 4 don't sit too well with us!) that you should know about.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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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.