Our Take On The Returns On Capital At LNA Santé (EPA:LNA)

If you're looking for a multi-bagger, there's a few things to 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. Although, when we looked at LNA Santé (EPA:LNA), it didn't seem to tick all of these boxes.

What is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for LNA Santé, this is the formula:

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

0.049 = €43m ÷ (€1.2b - €353m) (Based on the trailing twelve months to June 2020).

So, LNA Santé has an ROCE of 4.9%. On its own that's a low return, but compared to the average of 3.6% generated by the Healthcare industry, it's much better.

View our latest analysis for LNA Santé

In the above chart we have measured LNA Santé's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering LNA Santé here for free.

What Can We Tell From LNA Santé's ROCE Trend?

When we looked at the ROCE trend at LNA Santé, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 4.9% from 12% five years ago. However it looks like LNA Santé 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 may take some time before the company starts to see any change in earnings from these investments.

On a side note, LNA Santé has done well to pay down its current liabilities to 29% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

Our Take On LNA Santé's ROCE

Bringing it all together, while we're somewhat encouraged by LNA Santé's reinvestment in its own business, we're aware that returns are shrinking. Yet to long term shareholders the stock has gifted them an incredible 114% return in the last five years, so the market appears to be rosy about its future. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

If you'd like to know more about LNA Santé, we've spotted 2 warning signs, and 1 of them is potentially serious.

While LNA Santé 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. 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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