Here's What To Make Of Lyko Group's (STO:LYKO A) Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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 Lyko Group (STO:LYKO A) 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. The formula for this calculation on Lyko Group is:

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

0.045 = kr25m ÷ (kr886m - kr344m) (Based on the trailing twelve months to September 2020).

Thus, Lyko Group has an ROCE of 4.5%. Ultimately, that's a low return and it under-performs the Specialty Retail industry average of 14%.

View our latest analysis for Lyko Group

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

The Trend Of ROCE

When we looked at the ROCE trend at Lyko Group, we didn't gain much confidence. Over the last four years, returns on capital have decreased to 4.5% from 22% four years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

On a related note, Lyko Group has decreased its current liabilities to 39% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line

While returns have fallen for Lyko Group in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And the stock has done incredibly well with a 445% return over the last three years, so long term investors are no doubt ecstatic with that result. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

If you want to continue researching Lyko Group, you might be interested to know about the 1 warning sign that our analysis has discovered.

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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