Returns on Capital Paint A Bright Future For L&K Engineering (TWSE:6139)

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at the ROCE trend of L&K Engineering (TWSE:6139) we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for L&K Engineering, this is the formula:

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

0.26 = NT$5.1b ÷ (NT$55b - NT$35b) (Based on the trailing twelve months to March 2024).

Therefore, L&K Engineering has an ROCE of 26%. That's a fantastic return and not only that, it outpaces the average of 6.4% earned by companies in a similar industry.

Check out our latest analysis for L&K Engineering

Historical performance is a great place to start when researching a stock so above you can see the gauge for L&K Engineering's ROCE against it's prior returns. If you're interested in investigating L&K Engineering's past further, check out this free graph covering L&K Engineering's past earnings, revenue and cash flow.

What Can We Tell From L&K Engineering's ROCE Trend?

L&K Engineering is displaying some positive trends. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 26%. Basically the business is earning more per dollar of capital invested and in addition to that, 38% more capital is being employed now too. So we're very much inspired by what we're seeing at L&K Engineering thanks to its ability to profitably reinvest capital.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. The current liabilities has increased to 64% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. And with current liabilities at those levels, that's pretty high.

In Conclusion...

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 L&K Engineering has. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

On a final note, we've found 3 warning signs for L&K Engineering that we think 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com