Stock Analysis

Be Wary Of Lancaster Colony (NASDAQ:LANC) And Its Returns On Capital

NasdaqGS:LANC
Source: Shutterstock

What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. In light of that, when we looked at Lancaster Colony (NASDAQ:LANC) and its ROCE trend, we weren't exactly thrilled.

What Is Return On Capital Employed (ROCE)?

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. Analysts use this formula to calculate it for Lancaster Colony:

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

0.18 = US$166m ÷ (US$1.1b - US$169m) (Based on the trailing twelve months to June 2023).

Thus, Lancaster Colony has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 11% generated by the Food industry.

Check out our latest analysis for Lancaster Colony

roce
NasdaqGS:LANC Return on Capital Employed October 4th 2023

In the above chart we have measured Lancaster Colony's 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 Lancaster Colony here for free.

The Trend Of ROCE

On the surface, the trend of ROCE at Lancaster Colony doesn't inspire confidence. Over the last five years, returns on capital have decreased to 18% from 24% five years ago. However it looks like Lancaster Colony might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Key Takeaway

Bringing it all together, while we're somewhat encouraged by Lancaster Colony's reinvestment in its own business, we're aware that returns are shrinking. And with the stock having returned a mere 20% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

If you're still interested in Lancaster Colony it's worth checking out our FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.

While Lancaster Colony 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.

Valuation is complex, but we're helping make it simple.

Find out whether Lancaster Colony is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

View the Free Analysis

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.