Return Trends At Lakshmi Machine Works (NSE:LAXMIMACH) Aren't Appealing

What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. That's why when we briefly looked at Lakshmi Machine Works' (NSE:LAXMIMACH) ROCE trend, we were pretty happy with what we saw.

Understanding 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 Lakshmi Machine Works:

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

0.14 = ₹3.5b ÷ (₹41b - ₹15b) (Based on the trailing twelve months to December 2022).

So, Lakshmi Machine Works has an ROCE of 14%. That's a relatively normal return on capital, and it's around the 16% generated by the Machinery industry.

Check out our latest analysis for Lakshmi Machine Works

Above you can see how the current ROCE for Lakshmi Machine Works compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Lakshmi Machine Works here for free.

SWOT Analysis for Lakshmi Machine Works

How Are Returns Trending?

While the returns on capital are good, they haven't moved much. The company has employed 47% more capital in the last five years, and the returns on that capital have remained stable at 14%. 14% is a pretty standard return, and it provides some comfort knowing that Lakshmi Machine Works has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

What We Can Learn From Lakshmi Machine Works' ROCE

To sum it up, Lakshmi Machine Works has simply been reinvesting capital steadily, at those decent rates of return. In light of this, the stock has only gained 26% over the last five years for shareholders who have owned the stock in this period. So to determine if Lakshmi Machine Works is a multi-bagger going forward, we'd suggest digging deeper into the company's other fundamentals.

While Lakshmi Machine Works doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation on our platform.

While Lakshmi Machine Works isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.