Lucara Diamond (TSE:LUC) Hasn't Managed To Accelerate Its Returns

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. However, after briefly looking over the numbers, we don't think Lucara Diamond (TSE:LUC) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What Is It?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Lucara Diamond:

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

0.094 = US$44m ÷ (US$562m - US$91m) (Based on the trailing twelve months to September 2023).

Therefore, Lucara Diamond has an ROCE of 9.4%. On its own that's a low return, but compared to the average of 2.6% generated by the Metals and Mining industry, it's much better.

Check out our latest analysis for Lucara Diamond

In the above chart we have measured Lucara Diamond'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 report on analyst forecasts for the company.

The Trend Of ROCE

The returns on capital haven't changed much for Lucara Diamond in recent years. The company has employed 34% more capital in the last five years, and the returns on that capital have remained stable at 9.4%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

The Key Takeaway

Long story short, while Lucara Diamond has been reinvesting its capital, the returns that it's generating haven't increased. It seems that investors have little hope of these trends getting any better and that may have partly contributed to the stock collapsing 74% in the last five years. Therefore based on the analysis done in this article, we don't think Lucara Diamond has the makings of a multi-bagger.

On a separate note, we've found 1 warning sign for Lucara Diamond you'll probably want to know about.

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.