Returns On Capital Are Showing Encouraging Signs At LPKF Laser & Electronics (ETR:LPK)

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing 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)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested 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)

0.079 = €7.7m ÷ (€136m - €38m) (Based on the trailing twelve months to June 2022).

Thus, LPKF Laser & Electronics has an ROCE of 7.9%. On its own that's a low return on capital but it's in line with the industry's average returns of 8.4%.

Check out our latest analysis for LPKF Laser & Electronics

In the above chart we have measured LPKF Laser & Electronics' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for LPKF Laser & Electronics.

What Can We Tell From LPKF Laser & Electronics' ROCE Trend?

We're delighted to see that LPKF Laser & Electronics is reaping rewards from its investments and is now generating some pre-tax profits. About five years ago the company was generating losses but things have turned around because it's now earning 7.9% on its capital. In addition to that, LPKF Laser & Electronics is employing 31% more capital than previously which is expected of a company that's trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

The Key Takeaway

In summary, it's great to see that LPKF Laser & Electronics has managed to break into profitability and is continuing to reinvest in its business. Since the stock has only returned 10% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

While LPKF Laser & Electronics looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether LPK is currently trading for a fair price.

While LPKF Laser & Electronics isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.