LPP (WSE:LPP) Knows How To Allocate Capital Effectively

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. And in light of that, the trends we're seeing at LPP's (WSE:LPP) look very promising so lets take a look.

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 LPP is:

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

0.23 = zł1.6b ÷ (zł13b - zł6.0b) (Based on the trailing twelve months to October 2021).

Therefore, LPP has an ROCE of 23%. In absolute terms that's a great return and it's even better than the Luxury industry average of 14%.

View our latest analysis for LPP

Above you can see how the current ROCE for LPP compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering LPP here for free.

What Can We Tell From LPP's ROCE Trend?

LPP is displaying some positive trends. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 23%. Basically the business is earning more per dollar of capital invested and in addition to that, 208% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

Another thing to note, LPP has a high ratio of current liabilities to total assets of 46%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On LPP's ROCE

To sum it up, LPP has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And a remarkable 243% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if LPP can keep these trends up, it could have a bright future ahead.

If you'd like to know about the risks facing LPP, we've discovered 1 warning sign that you should be aware of.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.