Be Wary Of Labo Print (WSE:LAB) And Its Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Labo Print (WSE:LAB) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding 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. Analysts use this formula to calculate it for Labo Print:

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

0.19 = zł8.7m ÷ (zł66m - zł20m) (Based on the trailing twelve months to September 2020).

Therefore, Labo Print has an ROCE of 19%. On its own, that's a standard return, however it's much better than the 14% generated by the Commercial Services industry.

Check out our latest analysis for Labo Print

Historical performance is a great place to start when researching a stock so above you can see the gauge for Labo Print's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Labo Print, check out these free graphs here.

What Can We Tell From Labo Print's ROCE Trend?

In terms of Labo Print's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 25% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

The Bottom Line

In summary, despite lower returns in the short term, we're encouraged to see that Labo Print is reinvesting for growth and has higher sales as a result. These trends are starting to be recognized by investors since the stock has delivered a 34% gain to shareholders who've held over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

One more thing, we've spotted 2 warning signs facing Labo Print that you might find interesting.

While Labo Print 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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