Returns On Capital Signal Tricky Times Ahead For Lead Real Estate (NASDAQ:LRE)

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. However, after investigating Lead Real Estate (NASDAQ:LRE), we don't think it's current trends fit the mold of a multi-bagger.

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. To calculate this metric for Lead Real Estate, this is the formula:

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

0.059 = JP¥559m ÷ (JP¥17b - JP¥8.0b) (Based on the trailing twelve months to December 2023).

Therefore, Lead Real Estate has an ROCE of 5.9%. Ultimately, that's a low return and it under-performs the Consumer Durables industry average of 14%.

See our latest analysis for Lead Real Estate

Historical performance is a great place to start when researching a stock so above you can see the gauge for Lead Real Estate's ROCE against it's prior returns. If you'd like to look at how Lead Real Estate has performed in the past in other metrics, you can view this free graph of Lead Real Estate's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Lead Real Estate doesn't inspire confidence. Around three years ago the returns on capital were 10%, but since then they've fallen to 5.9%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, Lead Real Estate has done well to pay down its current liabilities to 46% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE. Keep in mind 46% is still pretty high, so those risks are still somewhat prevalent.

In Conclusion...

In summary, despite lower returns in the short term, we're encouraged to see that Lead Real Estate is reinvesting for growth and has higher sales as a result. But since the stock has dived 72% in the last year, there could be other drivers that are influencing the business' outlook. Regardless, reinvestment can pay off in the long run, so we think astute investors may want to look further into this stock.

If you'd like to know more about Lead Real Estate, we've spotted 4 warning signs, and 2 of them are a bit unpleasant.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.