To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So on that note, Lincoln Educational Services (NASDAQ:LINC) looks quite promising in regards to its trends of return on capital.
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. The formula for this calculation on Lincoln Educational Services is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.10 = US$19m ÷ (US$245m - US$62m) (Based on the trailing twelve months to June 2021).
Thus, Lincoln Educational Services has an ROCE of 10%. In absolute terms, that's a satisfactory return, but compared to the Consumer Services industry average of 8.2% it's much better.
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 to see what analysts are forecasting going forward, you should check out our free report for Lincoln Educational Services.
What The Trend Of ROCE Can Tell Us
Investors would be pleased with what's happening at Lincoln Educational Services. The data shows that returns on capital have increased substantially over the last five years to 10%. Basically the business is earning more per dollar of capital invested and in addition to that, 60% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.
In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 26%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So this improvement in ROCE has come from the business' underlying economics, which is great to see.
What We Can Learn From Lincoln Educational Services' ROCE
All in all, it's terrific to see that Lincoln Educational Services is reaping the rewards from prior investments and is growing its capital base. And a remarkable 218% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
On a final note, we found 2 warning signs for Lincoln Educational Services (1 is a bit concerning) you should be aware of.
While Lincoln Educational 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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Lincoln Educational Services
Lincoln Educational Services Corporation, together with its subsidiaries, provides various career-oriented post-secondary education services to high school graduates and working adults in the United States.
Flawless balance sheet and fair value.