Leon's Furniture (TSE:LNF) Shareholders Will Want The ROCE Trajectory To Continue

What trends should we look for it we want to identify stocks that can 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at Leon's Furniture (TSE:LNF) and its trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Leon's Furniture:

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

0.16 = CA$255m ÷ (CA$2.2b - CA$610m) (Based on the trailing twelve months to December 2022).

Therefore, Leon's Furniture has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the Specialty Retail industry average of 9.3% it's much better.

View our latest analysis for Leon's Furniture

Above you can see how the current ROCE for Leon's Furniture compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Leon's Furniture.

SWOT Analysis for Leon's Furniture

The Trend Of ROCE

We like the trends that we're seeing from Leon's Furniture. Over the last five years, returns on capital employed have risen substantially to 16%. The amount of capital employed has increased too, by 28%. So we're very much inspired by what we're seeing at Leon's Furniture thanks to its ability to profitably reinvest capital.

Our Take On Leon's Furniture's ROCE

All in all, it's terrific to see that Leon's Furniture is reaping the rewards from prior investments and is growing its capital base. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 56% return over the last five years. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Leon's Furniture does have some risks, we noticed 2 warning signs (and 1 which can't be ignored) we think you should know about.

While Leon's Furniture 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.