Is Lena Lighting (WSE:LEN) Set To Make A Turnaround?

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This indicates the company is producing less profit from its investments and its total assets are decreasing. On that note, looking into Lena Lighting (WSE:LEN), we weren't too upbeat about how things were going.

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 Lena Lighting is:

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

0.088 = zł8.5m ÷ (zł112m - zł15m) (Based on the trailing twelve months to September 2020).

Thus, Lena Lighting has an ROCE of 8.8%. On its own, that's a low figure but it's around the 10% average generated by the Electrical industry.

View our latest analysis for Lena Lighting

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Lena Lighting's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Lena Lighting's ROCE Trend?

There is reason to be cautious about Lena Lighting, given the returns are trending downwards. About five years ago, returns on capital were 14%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Lena Lighting becoming one if things continue as they have.

Our Take On Lena Lighting's ROCE

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. In spite of that, the stock has delivered a 30% return to shareholders who held over the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

If you'd like to know more about Lena Lighting, we've spotted 3 warning signs, and 1 of them makes us a bit uncomfortable.

While Lena Lighting 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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