Returns On Capital At Lokesh Machines (NSE:LOKESHMACH) Have Stalled

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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Lokesh Machines (NSE:LOKESHMACH) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What is it?

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 Lokesh Machines:

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

0.11 = ₹192m ÷ (₹2.8b - ₹1.1b) (Based on the trailing twelve months to September 2021).

Therefore, Lokesh Machines has an ROCE of 11%. In isolation, that's a pretty standard return but against the Machinery industry average of 14%, it's not as good.

See 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.

What Can We Tell From Lokesh Machines' ROCE Trend?

Over the past five years, Lokesh Machines' ROCE and capital employed have both remained mostly flat. Businesses with these traits tend to be mature and steady operations because they're 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.

What We Can Learn From Lokesh Machines' ROCE

In summary, Lokesh Machines isn't compounding its earnings but is generating stable returns on the same amount of capital employed. And investors appear hesitant that the trends will pick up because the stock has fallen 13% in the last five years. Therefore based on the analysis done in this article, we don't think Lokesh Machines has the makings of a multi-bagger.

Lokesh Machines does come with some risks though, we found 4 warning signs in our investment analysis, and 2 of those shouldn't be ignored...

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.

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.

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