To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. And in light of that, the trends we're seeing at Lockheed Martin's (NYSE:LMT) look very promising so lets take a look.
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. To calculate this metric for Lockheed Martin, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.25 = US$9.1b ÷ (US$51b - US$15b) (Based on the trailing twelve months to March 2021).
Thus, Lockheed Martin has an ROCE of 25%. In absolute terms that's a great return and it's even better than the Aerospace & Defense industry average of 7.9%.
In the above chart we have measured Lockheed Martin's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Lockheed Martin.
The Trend Of ROCE
Lockheed Martin's ROCE growth is quite impressive. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 92% in that same time. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.
To bring it all together, Lockheed Martin has done well to increase the returns it's generating from its capital employed. Since the stock has returned a solid 74% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. In light of that, we think it's worth looking further into this stock because if Lockheed Martin can keep these trends up, it could have a bright future ahead.
Lockheed Martin does have some risks though, and we've spotted 2 warning signs for Lockheed Martin that you might be interested in.
High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.
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