Luka Rijeka d.d (ZGSE:LKRI) Is Doing The Right Things To Multiply Its Share Price

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in Luka Rijeka d.d's (ZGSE:LKRI) returns on capital, so let's have a look.

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. To calculate this metric for Luka Rijeka d.d, this is the formula:

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

0.028 = Kn22m ÷ (Kn990m - Kn203m) (Based on the trailing twelve months to September 2022).

Therefore, Luka Rijeka d.d has an ROCE of 2.8%. Ultimately, that's a low return and it under-performs the Infrastructure industry average of 8.4%.

See our latest analysis for Luka Rijeka d.d

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

What The Trend Of ROCE Can Tell Us

Shareholders will be relieved that Luka Rijeka d.d has broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 2.8% on its capital. While returns have increased, the amount of capital employed by Luka Rijeka d.d has remained flat over the period. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. The current liabilities has increased to 21% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

In Conclusion...

To sum it up, Luka Rijeka d.d is collecting higher returns from the same amount of capital, and that's impressive. Since the stock has returned a solid 69% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

One more thing, we've spotted 1 warning sign facing Luka Rijeka d.d that you might find interesting.

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.