Has L.G. Balakrishnan & Bros (NSE:LGBBROSLTD) Got What It Takes To Become A Multi-Bagger?

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at L.G. Balakrishnan & Bros (NSE:LGBBROSLTD), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What is it?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on L.G. Balakrishnan & Bros is:

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

0.094 = ₹791m ÷ (₹12b - ₹3.6b) (Based on the trailing twelve months to September 2020).

So, L.G. Balakrishnan & Bros has an ROCE of 9.4%. In absolute terms, that's a low return but it's around the Machinery industry average of 9.6%.

See our latest analysis for L.G. Balakrishnan & Bros

Above you can see how the current ROCE for L.G. Balakrishnan & Bros 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 L.G. Balakrishnan & Bros here for free.

How Are Returns Trending?

When we looked at the ROCE trend at L.G. Balakrishnan & Bros, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 9.4% from 19% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

In Conclusion...

We're a bit apprehensive about L.G. Balakrishnan & Bros because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Despite the concerning underlying trends, the stock has actually gained 9.7% over the last five years, so it might be that the investors are expecting the trends to reverse. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

Like most companies, L.G. Balakrishnan & Bros does come with some risks, and we've found 3 warning signs that you should be aware of.

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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