If you're looking for a multi-bagger, there's a few things to keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. 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.
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. Analysts use this formula to calculate it for Labo Print:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.17 = zł7.7m ÷ (zł66m - zł21m) (Based on the trailing twelve months to June 2020).
Therefore, Labo Print has an ROCE of 17%. In absolute terms, that's a satisfactory return, but compared to the Commercial Services industry average of 14% it's much better.
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're interested in investigating Labo Print's past further, check out this free graph of past earnings, revenue and cash flow.
So How Is Labo Print's ROCE Trending?
On the surface, the trend of ROCE at Labo Print doesn't inspire confidence. Around five years ago the returns on capital were 27%, but since then they've fallen to 17%. 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
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Labo Print. And there could be an opportunity here if other metrics look good too, because the stock has declined 35% in the last five years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.
On a final note, we found 2 warning signs for Labo Print (1 is potentially serious) you should be aware of.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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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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