Should We Be Excited About The Trends Of Returns At Lesico (TLV:LSCO)?

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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Lesico (TLV:LSCO) and its ROCE trend, we weren't exactly thrilled.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Lesico:

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

0.053 = ₪12m ÷ (₪491m - ₪258m) (Based on the trailing twelve months to September 2020).

Therefore, Lesico has an ROCE of 5.3%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 10%.

See our latest analysis for Lesico

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 want to delve into the historical earnings, revenue and cash flow of Lesico, check out these free graphs here.

So How Is Lesico's ROCE Trending?

In terms of Lesico's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 36% over the last four years. However it looks like Lesico 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, Lesico's current liabilities are still rather high at 53% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line On Lesico's ROCE

To conclude, we've found that Lesico is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 29% in the last three years. Therefore based on the analysis done in this article, we don't think Lesico has the makings of a multi-bagger.

Lesico does come with some risks though, we found 6 warning signs in our investment analysis, and 3 of those are potentially serious...

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. 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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