Lyko Group's (STO:LYKO A) Returns On Capital Are Heading Higher

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Speaking of which, we noticed some great changes in Lyko Group's (STO:LYKO A) returns on capital, so let's have a look.

Our free stock report includes 2 warning signs investors should be aware of before investing in Lyko Group. Read for free now.

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. To calculate this metric for Lyko Group, this is the formula:

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

0.082 = kr105m ÷ (kr2.3b - kr1.0b) (Based on the trailing twelve months to December 2024).

Thus, Lyko Group has an ROCE of 8.2%. On its own, that's a low figure but it's around the 8.6% average generated by the Specialty Retail industry.

View our latest analysis for Lyko Group

Above you can see how the current ROCE for Lyko Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Lyko Group .

What Can We Tell From Lyko Group's ROCE Trend?

While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 8.2%. Basically the business is earning more per dollar of capital invested and in addition to that, 145% more capital is being employed now too. So we're very much inspired by what we're seeing at Lyko Group thanks to its ability to profitably reinvest capital.

On a separate but related note, it's important to know that Lyko Group has a current liabilities to total assets ratio of 44%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

What We Can Learn From Lyko Group's ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Lyko Group has. Since the total return from the stock has been almost flat over the last five years, there might be an opportunity here if the valuation looks good. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

If you'd like to know more about Lyko Group, we've spotted 2 warning signs, and 1 of them is significant.

While Lyko Group 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. 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.