Should You Be Impressed By L.G. Balakrishnan & Bros' (NSE:LGBBROSLTD) Returns on Capital?

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. In light of that, when we looked at L.G. Balakrishnan & Bros (NSE:LGBBROSLTD) and its ROCE trend, we weren't exactly thrilled.

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. Analysts use this formula to calculate it for L.G. Balakrishnan & Bros:

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).

So, L.G. Balakrishnan & Bros has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 11% generated by the Machinery industry.

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

In the above chart we have measured L.G. Balakrishnan & Bros' prior ROCE against its prior performance, but the future is arguably more important. 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?

On the surface, the trend of ROCE at L.G. Balakrishnan & Bros doesn't inspire 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.

Our Take On L.G. Balakrishnan & Bros' ROCE

Bringing it all together, while we're somewhat encouraged by L.G. Balakrishnan & Bros' reinvestment in its own business, we're aware that returns are shrinking. Since the stock has gained an impressive 58% over the last five years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

If you'd like to know about the risks facing L.G. Balakrishnan & Bros, we've discovered 1 warning sign 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.

If you decide to trade L.G. Balakrishnan & Bros, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.