If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at Lavena AD (BUL:4L4) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
Understanding Return On Capital Employed (ROCE)
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Lavena AD:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.075 = лв2.3m ÷ (лв34m - лв2.9m) (Based on the trailing twelve months to September 2020).
Thus, Lavena AD has an ROCE of 7.5%. Ultimately, that's a low return and it under-performs the Personal Products industry average of 9.5%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Lavena AD's ROCE against it's prior returns. If you're interested in investigating Lavena AD's past further, check out this free graph of past earnings, revenue and cash flow.
How Are Returns Trending?
There are better returns on capital out there than what we're seeing at Lavena AD. Over the past five years, ROCE has remained relatively flat at around 7.5% and the business has deployed 65% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.
What We Can Learn From Lavena AD's ROCE
Long story short, while Lavena AD has been reinvesting its capital, the returns that it's generating haven't increased. Although the market must be expecting these trends to improve because the stock has gained 96% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.
On a final note, we've found 1 warning sign for Lavena AD that we think you should be aware of.
While Lavena AD may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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