Returns On Capital Are A Standout For Liquidity Services (NASDAQ:LQDT)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Liquidity Services' (NASDAQ:LQDT) returns on capital, so let's have a look.

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 Liquidity Services is:

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

0.20 = US$29m ÷ (US$277m - US$133m) (Based on the trailing twelve months to March 2022).

So, Liquidity Services has an ROCE of 20%. In absolute terms that's a great return and it's even better than the Online Retail industry average of 12%.

View our latest analysis for Liquidity Services

Above you can see how the current ROCE for Liquidity Services compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Liquidity Services.

What Can We Tell From Liquidity Services' ROCE Trend?

Shareholders will be relieved that Liquidity Services has broken into profitability. The company now earns 20% on its capital, because five years ago it was incurring losses. Interestingly, the capital employed by the business has remained relatively flat, so these higher returns are either from prior investments paying off or increased efficiencies. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. Because in the end, a business can only get so efficient.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 48% of the business, which is more than it was five years ago. And with current liabilities at those levels, that's pretty high.

What We Can Learn From Liquidity Services' ROCE

In summary, we're delighted to see that Liquidity Services has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And a remarkable 132% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.

One final note, you should learn about the 2 warning signs we've spotted with Liquidity Services (including 1 which shouldn't be ignored) .

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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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.