We Like These Underlying Return On Capital Trends At Liquidity Services (NASDAQ:LQDT)

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. With that in mind, we've noticed some promising trends at Liquidity Services (NASDAQ:LQDT) so let's look a bit deeper.

What Is 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. The formula for this calculation on Liquidity Services is:

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

0.14 = US$26m ÷ (US$326m - US$143m) (Based on the trailing twelve months to June 2024).

So, Liquidity Services has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Commercial Services industry average of 10% it's much better.

See our latest analysis for Liquidity Services

Above you can see how the current ROCE for Liquidity Services compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Liquidity Services for free.

So How Is Liquidity Services' ROCE Trending?

The fact that Liquidity Services is now generating some pre-tax profits from its prior investments is very encouraging. About five years ago the company was generating losses but things have turned around because it's now earning 14% on its capital. In addition to that, Liquidity Services is employing 48% more capital than previously which is expected of a company that's trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

On a separate but related note, it's important to know that Liquidity Services has a current liabilities to total assets ratio of 44%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line On Liquidity Services' ROCE

To the delight of most shareholders, Liquidity Services has now broken into profitability. Since the stock has returned a staggering 257% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Liquidity Services can keep these trends up, it could have a bright future ahead.

Like most companies, Liquidity Services does come with some risks, and we've found 1 warning sign that you should be aware of.

While Liquidity Services 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.