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Shareholders Would Enjoy A Repeat Of Liquidity Services' (NASDAQ:LQDT) Recent Growth In Returns
What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. And in light of that, the trends we're seeing at Liquidity Services' (NASDAQ:LQDT) look very promising so lets take 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$26m ÷ (US$238m - US$110m) (Based on the trailing twelve months to June 2021).
Therefore, Liquidity Services has an ROCE of 20%. That's a fantastic return and not only that, it outpaces the average of 12% earned by companies in a similar industry.
Check out our latest analysis for Liquidity Services
In the above chart we have measured Liquidity 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 Liquidity Services here for free.
What Does the ROCE Trend For Liquidity Services Tell Us?
Like most people, we're pleased that Liquidity Services is now generating some pretax earnings. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 20% on their capital employed. At first glance, it seems the business is getting more proficient at generating returns, because over the same period, the amount of capital employed has reduced by 42%. The reduction could indicate that the company is selling some assets, and considering returns are up, they appear to be selling the right ones.
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. Essentially the business now has suppliers or short-term creditors funding about 46% of its operations, which isn't ideal. And with current liabilities at those levels, that's pretty high.
Our Take On Liquidity Services' ROCE
In summary, it's great to see that Liquidity Services has been able to turn things around and earn higher returns on lower amounts of capital. And a remarkable 157% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Liquidity Services can keep these trends up, it could have a bright future ahead.
Liquidity Services does have some risks though, and we've spotted 2 warning signs for Liquidity Services that you might be interested in.
Liquidity Services is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.
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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.
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About NasdaqGS:LQDT
Liquidity Services
Provides e-commerce marketplaces, self-directed auction listing tools, and value-added services in the United States and internationally.
Flawless balance sheet with moderate growth potential.