Returns On Capital At Lokesh Machines (NSE:LOKESHMACH) Have Hit The Brakes

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Lokesh Machines (NSE:LOKESHMACH) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. Analysts use this formula to calculate it for Lokesh Machines:

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

0.12 = ₹213m ÷ (₹2.9b - ₹1.1b) (Based on the trailing twelve months to June 2022).

So, Lokesh Machines has an ROCE of 12%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Machinery industry average of 14%.

Check out our latest analysis for Lokesh Machines

Historical performance is a great place to start when researching a stock so above you can see the gauge for Lokesh Machines' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Lokesh Machines, check out these free graphs here.

How Are Returns Trending?

There hasn't been much to report for Lokesh Machines' returns and its level of capital employed because both metrics have been steady for the past five years. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. So don't be surprised if Lokesh Machines doesn't end up being a multi-bagger in a few years time.

The Bottom Line On Lokesh Machines' ROCE

In a nutshell, Lokesh Machines has been trudging along with the same returns from the same amount of capital over the last five years. Although the market must be expecting these trends to improve because the stock has gained 58% over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

Lokesh Machines does have some risks, we noticed 4 warning signs (and 3 which don't sit too well with us) we think you should know about.

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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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.