Is Lerøy Seafood Group (OB:LSG) Likely To Turn Things Around?

There are a few key trends to look for if we want to identify the next multi-bagger. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Lerøy Seafood Group (OB:LSG) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What is 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. The formula for this calculation on Lerøy Seafood Group is:

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

0.088 = kr2.3b ÷ (kr30b - kr4.1b) (Based on the trailing twelve months to September 2020).

Thus, Lerøy Seafood Group has an ROCE of 8.8%. In absolute terms, that's a low return, but it's much better than the Food industry average of 7.3%.

See our latest analysis for Lerøy Seafood Group

In the above chart we have measured Lerøy Seafood Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Lerøy Seafood Group.

What Can We Tell From Lerøy Seafood Group's ROCE Trend?

When we looked at the ROCE trend at Lerøy Seafood Group, we didn't gain much confidence. Around five years ago the returns on capital were 12%, but since then they've fallen to 8.8%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

What We Can Learn From Lerøy Seafood Group's ROCE

In summary, Lerøy Seafood Group is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Although the market must be expecting these trends to improve because the stock has gained 94% 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.

One more thing to note, we've identified 1 warning sign with Lerøy Seafood Group and understanding this should be part of your investment process.

While Lerøy Seafood Group 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. 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.
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