Return Trends At Lyko Group (STO:LYKO A) Aren't Appealing

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Lyko Group (STO:LYKO A) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What is it?

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 Lyko Group:

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

0.079 = kr43m ÷ (kr946m - kr400m) (Based on the trailing twelve months to December 2020).

Thus, Lyko Group has an ROCE of 7.9%. Ultimately, that's a low return and it under-performs the Specialty Retail industry average of 13%.

See our latest analysis for Lyko Group

In the above chart we have measured Lyko Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Lyko Group here for free.

The Trend Of ROCE

In terms of Lyko Group's historical ROCE trend, it doesn't exactly demand attention. The company has employed 307% more capital in the last five years, and the returns on that capital have remained stable at 7.9%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 42% of total assets, is good to see from a business owner's perspective. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously. Although because current liabilities are still 42%, some of that risk is still prevalent.

Our Take On Lyko Group's ROCE

As we've seen above, Lyko Group's returns on capital haven't increased but it is reinvesting in the business. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 562% gain to shareholders who have held over the last three years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

If you're still interested in Lyko Group it's worth checking out our FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.

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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