Capital Allocation Trends At Lucky Harvest (SZSE:002965) Aren't Ideal

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Lucky Harvest (SZSE:002965), it didn't seem to tick all of these boxes.

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. To calculate this metric for Lucky Harvest, this is the formula:

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

0.11 = CN¥460m ÷ (CN¥7.4b - CN¥3.2b) (Based on the trailing twelve months to September 2024).

So, Lucky Harvest has an ROCE of 11%. On its own, that's a standard return, however it's much better than the 5.2% generated by the Machinery industry.

See our latest analysis for Lucky Harvest

Above you can see how the current ROCE for Lucky Harvest 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 analyst report for Lucky Harvest .

What Can We Tell From Lucky Harvest's ROCE Trend?

We weren't thrilled with the trend because Lucky Harvest's ROCE has reduced by 42% over the last five years, while the business employed 365% more capital. Usually this isn't ideal, but given Lucky Harvest conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. Lucky Harvest probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

On a separate but related note, it's important to know that Lucky Harvest has a current liabilities to total assets ratio of 43%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

What We Can Learn From Lucky Harvest's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Lucky Harvest. Furthermore the stock has climbed 43% over the last five years, it would appear that investors are upbeat about the future. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

If you'd like to know about the risks facing Lucky Harvest, we've discovered 2 warning signs that you should be aware of.

While Lucky Harvest 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.