Will the Promising Trends At Lechwerke (FRA:LEC) Continue?

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. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at Lechwerke (FRA:LEC) 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 Lechwerke:

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

0.049 = €85m ÷ (€1.9b - €176m) (Based on the trailing twelve months to June 2020).

Thus, Lechwerke has an ROCE of 4.9%. In absolute terms, that's a low return and it also under-performs the Electric Utilities industry average of 6.5%.

See our latest analysis for Lechwerke

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Lechwerke has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. The data shows that returns on capital have increased substantially over the last five years to 4.9%. Basically the business is earning more per dollar of capital invested and in addition to that, 189% more capital is being employed now too. So we're very much inspired by what we're seeing at Lechwerke thanks to its ability to profitably reinvest capital.

On a related note, the company's ratio of current liabilities to total assets has decreased to 9.3%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

The Bottom Line

All in all, it's terrific to see that Lechwerke is reaping the rewards from prior investments and is growing its capital base. And with a respectable 68% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. In light of that, we think it's worth looking further into this stock because if Lechwerke can keep these trends up, it could have a bright future ahead.

Lechwerke does have some risks, we noticed 3 warning signs (and 1 which can't be ignored) we think you should know about.

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

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This article by Simply Wall St is general in nature. 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.
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