The Trend Of High Returns At Lloyds Engineering Works (NSE:LLOYDSENGG) Has Us Very Interested

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. With that in mind, the ROCE of Lloyds Engineering Works (NSE:LLOYDSENGG) looks great, so lets see what the trend can tell us.

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)

0.25 = ₹684m ÷ (₹4.6b - ₹1.9b) (Based on the trailing twelve months to September 2023).

Therefore, Lloyds Engineering Works has an ROCE of 25%. In absolute terms that's a great return and it's even better than the Machinery industry average of 17%.

View our latest analysis for Lloyds Engineering Works

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Lloyds Engineering Works has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Lloyds Engineering Works Tell Us?

Lloyds Engineering Works has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 25% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Lloyds Engineering Works is utilizing 145% more capital than it was five years ago. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

On a related note, the company's ratio of current liabilities to total assets has decreased to 40%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

What We Can Learn From Lloyds Engineering Works' ROCE

Long story short, we're delighted to see that Lloyds Engineering Works' reinvestment activities have paid off and the company is now profitable. And a remarkable 4,523% 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.

If you'd like to know more about Lloyds Engineering Works, we've spotted 3 warning signs, and 1 of them is significant.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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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.