Returns On Capital Are Showing Encouraging Signs At Lumi Gruppen (OB:LUMI)

There are a few key trends to look for if we want to identify the next multi-bagger. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, we've noticed some promising trends at Lumi Gruppen (OB:LUMI) so let's look a bit deeper.

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

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Lumi Gruppen, this is the formula:

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

0.069 = kr58m ÷ (kr941m - kr95m) (Based on the trailing twelve months to June 2023).

Therefore, Lumi Gruppen has an ROCE of 6.9%. Ultimately, that's a low return and it under-performs the Consumer Services industry average of 9.6%.

Check out our latest analysis for Lumi Gruppen

Historical performance is a great place to start when researching a stock so above you can see the gauge for Lumi Gruppen's ROCE against it's prior returns. If you'd like to look at how Lumi Gruppen has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

Lumi Gruppen has not disappointed with their ROCE growth. The figures show that over the last four years, ROCE has grown 22% whilst employing roughly the same amount of capital. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

The Key Takeaway

In summary, we're delighted to see that Lumi Gruppen has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 72% return over the last year. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

One more thing: We've identified 5 warning signs with Lumi Gruppen (at least 4 which don't sit too well with us) , and understanding these would certainly be useful.

While Lumi Gruppen may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list 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.