Returns On Capital Are Showing Encouraging Signs At Lincoln Educational Services (NASDAQ:LINC)

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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 Lincoln Educational Services (NASDAQ:LINC) so let's look a bit deeper.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Lincoln Educational Services is:

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

0.023 = US$5.2m ÷ (US$288m - US$55m) (Based on the trailing twelve months to March 2022).

Thus, Lincoln Educational Services has an ROCE of 2.3%. In absolute terms, that's a low return and it also under-performs the Consumer Services industry average of 6.3%.

View our latest analysis for Lincoln Educational Services

In the above chart we have measured Lincoln Educational Services' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Lincoln Educational Services here for free.

What Can We Tell From Lincoln Educational Services' ROCE Trend?

We're delighted to see that Lincoln Educational Services is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses five years ago, but now it's earning 2.3% which is a sight for sore eyes. Not only that, but the company is utilizing 192% more capital than before, but that's to be expected from a company trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

One more thing to note, Lincoln Educational Services has decreased current liabilities to 19% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

The Bottom Line

Overall, Lincoln Educational Services gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. And with a respectable 72% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. In light of that, we think it's worth looking further into this stock because if Lincoln Educational Services can keep these trends up, it could have a bright future ahead.

If you want to continue researching Lincoln Educational Services, you might be interested to know about the 3 warning signs that our analysis has discovered.

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.