Returns On Capital Are A Standout For Lloyds Engineering Works (NSE:LLOYDSENGG)

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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at the ROCE trend of Lloyds Engineering Works (NSE:LLOYDSENGG) we really liked what we saw.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Lloyds Engineering Works, this is the formula:

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

0.22 = ₹970m ÷ (₹5.7b - ₹1.4b) (Based on the trailing twelve months to March 2024).

So, Lloyds Engineering Works has an ROCE of 22%. That's a fantastic return and not only that, it outpaces the average of 17% earned by companies in a similar industry.

See our latest analysis for Lloyds Engineering Works

Historical performance is a great place to start when researching a stock so above you can see the gauge for Lloyds Engineering Works' ROCE against it's prior returns. If you're interested in investigating Lloyds Engineering Works' past further, check out this free graph covering Lloyds Engineering Works' past earnings, revenue and cash flow.

What Can We Tell From Lloyds Engineering Works' ROCE Trend?

We're delighted to see that Lloyds Engineering Works is reaping rewards from its investments and is now generating some pre-tax profits. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 22% on its capital. And unsurprisingly, like most companies trying to break into the black, Lloyds Engineering Works is utilizing 275% more capital than it was five years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

One more thing to note, Lloyds Engineering Works has decreased current liabilities to 24% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

The Bottom Line On Lloyds Engineering Works' ROCE

In summary, it's great to see that Lloyds Engineering Works has managed to break into profitability and is continuing to reinvest in its business. And a remarkable 11,337% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Lloyds Engineering Works can keep these trends up, it could have a bright future ahead.

Lloyds Engineering Works does come with some risks though, we found 3 warning signs in our investment analysis, and 2 of those are potentially serious...

High returns are a key ingredient to strong performance, so check out our free list ofstocks 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.