LPA Group (LON:LPA) Might Be Having Difficulty Using Its Capital Effectively

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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. In light of that, when we looked at LPA Group (LON:LPA) and its ROCE trend, we weren't exactly thrilled.

What is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for LPA Group:

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

0.024 = UK£388k ÷ (UK£20m - UK£4.1m) (Based on the trailing twelve months to March 2021).

So, LPA Group has an ROCE of 2.4%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 14%.

View our latest analysis for LPA Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for LPA Group's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of LPA Group, check out these free graphs here.

What Does the ROCE Trend For LPA Group Tell Us?

When we looked at the ROCE trend at LPA Group, we didn't gain much confidence. To be more specific, ROCE has fallen from 10% over the last five years. However it looks like LPA Group 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.

In Conclusion...

Bringing it all together, while we're somewhat encouraged by LPA Group's reinvestment in its own business, we're aware that returns are shrinking. And in the last five years, the stock has given away 58% so the market doesn't look too hopeful on these trends strengthening any time soon. 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.

One final note, you should learn about the 5 warning signs we've spotted with LPA Group (including 1 which is significant) .

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.