Investors Met With Slowing Returns on Capital At Littelfuse (NASDAQ:LFUS)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Littelfuse (NASDAQ:LFUS) and its ROCE trend, we weren't exactly thrilled.

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. To calculate this metric for Littelfuse, this is the formula:

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

0.079 = US$286m ÷ (US$4.1b - US$440m) (Based on the trailing twelve months to September 2024).

Thus, Littelfuse has an ROCE of 7.9%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 10%.

See our latest analysis for Littelfuse

Above you can see how the current ROCE for Littelfuse compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Littelfuse .

What Can We Tell From Littelfuse's ROCE Trend?

In terms of Littelfuse's historical ROCE trend, it doesn't exactly demand attention. The company has employed 57% more capital in the last five years, and the returns on that capital have remained stable at 7.9%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

In Conclusion...

In summary, Littelfuse has simply been reinvesting capital and generating the same low rate of return as before. Unsurprisingly, the stock has only gained 36% over the last five years, which potentially indicates that investors are accounting for this going forward. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

On a separate note, we've found 1 warning sign for Littelfuse you'll probably want to know about.

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.