Should You Be Impressed By Lifestyle Global Enterprise's (GTSM:8066) Returns on Capital?

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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Lifestyle Global Enterprise (GTSM:8066), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Lifestyle Global Enterprise:

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

0.20 = NT$225m ÷ (NT$2.2b - NT$1.1b) (Based on the trailing twelve months to September 2020).

Thus, Lifestyle Global Enterprise has an ROCE of 20%. On its own, that's a standard return, however it's much better than the 8.4% generated by the Specialty Retail industry.

Check out our latest analysis for Lifestyle Global Enterprise

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Lifestyle Global Enterprise, check out these free graphs here.

What Can We Tell From Lifestyle Global Enterprise's ROCE Trend?

On the surface, the trend of ROCE at Lifestyle Global Enterprise doesn't inspire confidence. Around five years ago the returns on capital were 42%, but since then they've fallen to 20%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

Another thing to note, Lifestyle Global Enterprise has a high ratio of current liabilities to total assets of 49%. 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

In Conclusion...

From the above analysis, we find it rather worrisome that returns on capital and sales for Lifestyle Global Enterprise have fallen, meanwhile the business is employing more capital than it was five years ago. It should come as no surprise then that the stock has fallen 13% over the last five years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Lifestyle Global Enterprise does come with some risks though, we found 5 warning signs in our investment analysis, and 1 of those is significant...

While Lifestyle Global Enterprise 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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