La-Z-Boy (NYSE:LZB) Hasn't Managed To Accelerate Its Returns

What are the early trends we should look for to identify a stock that could multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. That's why when we briefly looked at La-Z-Boy's (NYSE:LZB) ROCE trend, we were pretty happy with what we saw.

Return On Capital Employed (ROCE): What Is It?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on La-Z-Boy is:

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

0.18 = US$226m ÷ (US$1.9b - US$639m) (Based on the trailing twelve months to July 2022).

Therefore, La-Z-Boy has an ROCE of 18%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Consumer Durables industry average of 17%.

View our latest analysis for La-Z-Boy

In the above chart we have measured La-Z-Boy'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 La-Z-Boy.

So How Is La-Z-Boy's ROCE Trending?

While the current returns on capital are decent, they haven't changed much. The company has consistently earned 18% for the last five years, and the capital employed within the business has risen 84% in that time. 18% is a pretty standard return, and it provides some comfort knowing that La-Z-Boy has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

On another note, while the change in ROCE trend might not scream for attention, it's interesting that the current liabilities have actually gone up over the last five years. This is intriguing because if current liabilities hadn't increased to 33% of total assets, this reported ROCE would probably be less than18% because total capital employed would be higher.The 18% ROCE could be even lower if current liabilities weren't 33% of total assets, because the the formula would show a larger base of total capital employed. With that in mind, just be wary if this ratio increases in the future, because if it gets particularly high, this brings with it some new elements of risk.

What We Can Learn From La-Z-Boy's ROCE

In the end, La-Z-Boy has proven its ability to adequately reinvest capital at good rates of return. However, over the last five years, the stock has only delivered a 4.5% return to shareholders who held over that period. So to determine if La-Z-Boy is a multi-bagger going forward, we'd suggest digging deeper into the company's other fundamentals.

One final note, you should learn about the 2 warning signs we've spotted with La-Z-Boy (including 1 which is concerning) .

While La-Z-Boy 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.