Returns On Capital At Linamar (TSE:LNR) Have Stalled

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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, the ROCE of Linamar (TSE:LNR) looks decent, right now, so lets see what the trend of returns can tell us.

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 Linamar, this is the formula:

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

0.11 = CA$911m ÷ (CA$11b - CA$2.8b) (Based on the trailing twelve months to June 2024).

Thus, Linamar has an ROCE of 11%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Auto Components industry average of 10%.

See our latest analysis for Linamar

In the above chart we have measured Linamar's 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 analyst report for Linamar .

How Are Returns Trending?

While the returns on capital are good, they haven't moved much. The company has consistently earned 11% for the last five years, and the capital employed within the business has risen 28% in that time. 11% is a pretty standard return, and it provides some comfort knowing that Linamar has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

What We Can Learn From Linamar's ROCE

To sum it up, Linamar has simply been reinvesting capital steadily, at those decent rates of return. In light of this, the stock has only gained 40% over the last five years for shareholders who have owned the stock in this period. So to determine if Linamar is a multi-bagger going forward, we'd suggest digging deeper into the company's other fundamentals.

If you're still interested in Linamar it's worth checking out our FREE intrinsic value approximation for LNR to see if it's trading at an attractive price in other respects.

While Linamar 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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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.