Lingotes Especiales' (BME:LGT) Returns On Capital Not Reflecting Well On The Business

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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Lingotes Especiales (BME:LGT), it didn't seem to tick all of these boxes.

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. To calculate this metric for Lingotes Especiales, this is the formula:

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

0.14 = €8.5m ÷ (€90m - €28m) (Based on the trailing twelve months to June 2021).

So, Lingotes Especiales has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Auto Components industry average of 9.5% it's much better.

See our latest analysis for Lingotes Especiales

Above you can see how the current ROCE for Lingotes Especiales 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 Lingotes Especiales.

So How Is Lingotes Especiales' ROCE Trending?

When we looked at the ROCE trend at Lingotes Especiales, we didn't gain much confidence. To be more specific, ROCE has fallen from 26% over the last five years. However it looks like Lingotes Especiales might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

Our Take On Lingotes Especiales' ROCE

Bringing it all together, while we're somewhat encouraged by Lingotes Especiales' reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 28% over the last five years, investors may not be too optimistic on this trend improving either. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

Like most companies, Lingotes Especiales does come with some risks, and we've found 2 warning signs that you should be aware of.

While Lingotes Especiales 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.