Returns On Capital At Lumi Gruppen (OB:LUMI) Have Stalled

What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Lumi Gruppen (OB:LUMI), we don't think it's current trends fit the mold of a multi-bagger.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Lumi Gruppen is:

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

0.052 = kr49m ÷ (kr1.2b - kr222m) (Based on the trailing twelve months to September 2023).

Therefore, Lumi Gruppen has an ROCE of 5.2%. In absolute terms, that's a low return and it also under-performs the Consumer Services industry average of 13%.

View 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're interested in investigating Lumi Gruppen's past further, check out this free graph covering Lumi Gruppen's past earnings, revenue and cash flow.

What Does the ROCE Trend For Lumi Gruppen Tell Us?

There hasn't been much to report for Lumi Gruppen's returns and its level of capital employed because both metrics have been steady for the past four years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So unless we see a substantial change at Lumi Gruppen in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger.

What We Can Learn From Lumi Gruppen's ROCE

We can conclude that in regards to Lumi Gruppen's returns on capital employed and the trends, there isn't much change to report on. Moreover, since the stock has crumbled 74% over the last three years, it appears investors are expecting the worst. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

One more thing: We've identified 4 warning signs with Lumi Gruppen (at least 3 which are potentially serious) , and understanding these would certainly be useful.

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.