Returns On Capital At Littelfuse (NASDAQ:LFUS) Have Hit The Brakes

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. So, when we ran our eye over Littelfuse's (NASDAQ:LFUS) trend of ROCE, we liked what we saw.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested 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)

0.16 = US$530m ÷ (US$3.8b - US$449m) (Based on the trailing twelve months to October 2022).

Thus, Littelfuse has an ROCE of 16%. On its own, that's a standard return, however it's much better than the 13% generated by the Electronic industry.

Check out our latest analysis for Littelfuse

In the above chart we have measured Littelfuse's 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 Littelfuse.

The Trend Of ROCE

While the returns on capital are good, they haven't moved much. The company has employed 125% more capital in the last five years, and the returns on that capital have remained stable at 16%. 16% is a pretty standard return, and it provides some comfort knowing that Littelfuse has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

The Bottom Line On Littelfuse's ROCE

In the end, Littelfuse has proven its ability to adequately reinvest capital at good rates of return. And given the stock has only risen 16% over the last five years, we'd suspect the market is beginning to recognize these trends. So to determine if Littelfuse is a multi-bagger going forward, we'd suggest digging deeper into the company's other fundamentals.

One more thing to note, we've identified 1 warning sign with Littelfuse and understanding it should be part of your investment process.

While Littelfuse 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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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.