Here's What To Make Of La-Z-Boy's (NYSE:LZB) Decelerating Rates Of Return
What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So, when we ran our eye over La-Z-Boy's (NYSE:LZB) trend of ROCE, we liked what we saw.
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. Analysts use this formula to calculate it for La-Z-Boy:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.16 = US$192m ÷ (US$1.9b - US$713m) (Based on the trailing twelve months to January 2022).
Therefore, La-Z-Boy has an ROCE of 16%. That's a relatively normal return on capital, and it's around the 14% generated by the Consumer Durables industry.
See our latest analysis for La-Z-Boy
In the above chart we have measured La-Z-Boy'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 La-Z-Boy.
What Does the ROCE Trend For La-Z-Boy Tell Us?
While the returns on capital are good, they haven't moved much. The company has employed 81% more capital in the last five years, and the returns on that capital have remained stable at 16%. Since 16% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. 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.
Another point to note, we noticed the company has increased current liabilities over the last five years. This is intriguing because if current liabilities hadn't increased to 37% of total assets, this reported ROCE would probably be less than16% because total capital employed would be higher.The 16% ROCE could be even lower if current liabilities weren't 37% of total assets, because the the formula would show a larger base of total capital employed. So while current liabilities isn't high right now, keep an eye out in case it increases further, because this can introduce some elements of risk.
In Conclusion...
In the end, La-Z-Boy has proven its ability to adequately reinvest capital at good rates of return. However, over the last five years, the stock has only delivered a 2.0% return to shareholders who held over that period. So to determine if La-Z-Boy is a multi-bagger going forward, we'd suggest digging deeper into the company's other fundamentals.
La-Z-Boy does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is a bit unpleasant...
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.
