Is There More Growth In Store For LPKF Laser & Electronics' (ETR:LPK) Returns On Capital?

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So on that note, LPKF Laser & Electronics (ETR:LPK) looks quite promising in regards to its trends of return on capital.

What is 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 LPKF Laser & Electronics:

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

0.10 = €10m ÷ (€118m - €17m) (Based on the trailing twelve months to September 2020).

Therefore, LPKF Laser & Electronics has an ROCE of 10.0%. On its own, that's a low figure but it's around the 8.7% average generated by the Electronic industry.

View our latest analysis for LPKF Laser & Electronics

Above you can see how the current ROCE for LPKF Laser & Electronics 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 LPKF Laser & Electronics.

What Does the ROCE Trend For LPKF Laser & Electronics Tell Us?

We're delighted to see that LPKF Laser & Electronics is reaping rewards from its investments and has now broken into profitability. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 10.0%, which is always encouraging. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

The Bottom Line On LPKF Laser & Electronics' ROCE

As discussed above, LPKF Laser & Electronics appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. And a remarkable 274% total return over the last five years tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

If you'd like to know about the risks facing LPKF Laser & Electronics, we've discovered 1 warning sign that you should be aware of.

While LPKF Laser & Electronics 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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