Investors Will Want Lincoln Educational Services' (NASDAQ:LINC) Growth In ROCE To Persist
If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So on that note, Lincoln Educational Services (NASDAQ:LINC) looks quite promising in regards to its trends of return on capital.
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 Lincoln Educational Services is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0096 = US$2.2m ÷ (US$285m - US$58m) (Based on the trailing twelve months to June 2022).
So, Lincoln Educational Services has an ROCE of 1.0%. Ultimately, that's a low return and it under-performs the Consumer Services industry average of 7.8%.
Check out our latest analysis for Lincoln Educational Services
Above you can see how the current ROCE for Lincoln Educational Services 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 report on analyst forecasts for the company.
The Trend Of ROCE
We're delighted to see that Lincoln Educational Services is reaping rewards from its investments and is now generating some pre-tax profits. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 1.0% on its capital. And unsurprisingly, like most companies trying to break into the black, Lincoln Educational Services is utilizing 210% more capital than it was five years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.
In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 20%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. This tells us that Lincoln Educational Services has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.
The Bottom Line
Overall, Lincoln Educational Services gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. And a remarkable 143% total return over the last five years tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.
If you want to continue researching Lincoln Educational Services, you might be interested to know about the 2 warning signs that our analysis has discovered.
While Lincoln Educational Services isn't earning the highest return, check out this free list of companies that are 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.
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