Returns On Capital At Deutsche Lufthansa (ETR:LHA) Have Stalled

To find a multi-bagger stock, what are the underlying trends we should look for in a business? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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 Deutsche Lufthansa (ETR:LHA) 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?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Deutsche Lufthansa is:

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

0.10 = €2.5b ÷ (€47b - €22b) (Based on the trailing twelve months to September 2023).

So, Deutsche Lufthansa has an ROCE of 10%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Airlines industry average of 8.7%.

Check out our latest analysis for Deutsche Lufthansa

In the above chart we have measured Deutsche Lufthansa's 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 Deutsche Lufthansa.

So How Is Deutsche Lufthansa's ROCE Trending?

Things have been pretty stable at Deutsche Lufthansa, with its capital employed and returns on that capital staying somewhat the same for the last five years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So don't be surprised if Deutsche Lufthansa doesn't end up being a multi-bagger in a few years time.

On a separate but related note, it's important to know that Deutsche Lufthansa has a current liabilities to total assets ratio of 46%, 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

What We Can Learn From Deutsche Lufthansa's ROCE

In a nutshell, Deutsche Lufthansa has been trudging along with the same returns from the same amount of capital over the last five years. Since the stock has declined 38% over the last five years, investors may not be too optimistic on this trend improving either. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

Deutsche Lufthansa could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation on our platform quite valuable.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.