We Like Locality Planning Energy Holdings' (ASX:LPE) Returns And Here's How They're Trending

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. And in light of that, the trends we're seeing at Locality Planning Energy Holdings' (ASX:LPE) look very promising so lets take a look.

What Is 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. To calculate this metric for Locality Planning Energy Holdings, this is the formula:

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 5.2%.

Check out 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 Does the ROCE Trend For Locality Planning Energy Holdings Tell Us?

The fact that Locality Planning Energy Holdings is now generating some pre-tax profits from its prior investments is very encouraging. 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. Not only that, but the company is utilizing 143% more capital than before, but that's to be expected from a company 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.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 59% of the business, which is more than it was five years ago. 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.

Our Take 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. 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.

Locality Planning Energy Holdings does have some risks, we noticed 5 warning signs (and 4 which are potentially serious) we think 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.