Lerøy Seafood Group (OB:LSG) Is Reinvesting At Lower Rates Of Return

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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.

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 Lerøy Seafood Group:

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

0.061 = kr1.6b ÷ (kr31b - kr4.0b) (Based on the trailing twelve months to March 2021).

Thus, Lerøy Seafood Group has an ROCE of 6.1%. On its own that's a low return on capital but it's in line with the industry's average returns of 6.1%.

Check out 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, you can check out the forecasts from the analysts covering Lerøy Seafood Group here for free.

What Does the ROCE Trend For Lerøy Seafood Group Tell Us?

On the surface, the trend of ROCE at Lerøy Seafood Group doesn't inspire confidence. Over the last five years, returns on capital have decreased to 6.1% from 17% five years ago. 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

Bringing it all together, while we're somewhat encouraged by Lerøy Seafood Group's reinvestment in its own business, we're aware that returns are shrinking. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 128% gain to shareholders who have held over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too 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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