L.G. Balakrishnan & Bros (NSE:LGBBROSLTD) Is Reinvesting At Lower Rates Of Return

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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating L.G. Balakrishnan & Bros (NSE:LGBBROSLTD), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

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. To calculate this metric for L.G. Balakrishnan & Bros, this is the formula:

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

0.14 = ₹1.1b ÷ (₹12b - ₹3.6b) (Based on the trailing twelve months to December 2020).

Thus, L.G. Balakrishnan & Bros has an ROCE of 14%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Machinery industry average of 12%.

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.

The Trend Of ROCE

When we looked at the ROCE trend at L.G. Balakrishnan & Bros, we didn't gain much confidence. Around five years ago the returns on capital were 18%, but since then they've fallen to 14%. However it looks like L.G. Balakrishnan & Bros 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.

The Bottom Line

To conclude, we've found that L.G. Balakrishnan & Bros is reinvesting in the business, but returns have been falling. Since the stock has gained an impressive 50% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

One more thing, we've spotted 1 warning sign facing L.G. Balakrishnan & Bros that you might find interesting.

While L.G. Balakrishnan & Bros may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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