If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. So on that note, Lapidoth Capital (TLV:LAPD) looks quite promising in regards to its trends of return on capital.
Understanding 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. To calculate this metric for Lapidoth Capital, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.064 = ₪216m ÷ (₪7.1b - ₪3.7b) (Based on the trailing twelve months to September 2020).
So, Lapidoth Capital has an ROCE of 6.4%. In absolute terms, that's a low return but it's around the Energy Services industry average of 6.9%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Lapidoth Capital's ROCE against it's prior returns. If you're interested in investigating Lapidoth Capital's past further, check out this free graph of past earnings, revenue and cash flow.
What Can We Tell From Lapidoth Capital's ROCE Trend?
While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. The data shows that returns on capital have increased substantially over the last five years to 6.4%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 494%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.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. Effectively this means that suppliers or short-term creditors are now funding 52% of the business, which is more than it was five years ago. And with current liabilities at those levels, that's pretty high.
To sum it up, Lapidoth Capital has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a staggering 702% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Lapidoth Capital can keep these trends up, it could have a bright future ahead.
If you want to know some of the risks facing Lapidoth Capital we've found 4 warning signs (1 shouldn't be ignored!) that you should be aware of before investing here.
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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