Lakeland Industries (NASDAQ:LAKE) Could Be Struggling To Allocate Capital
There are a few key trends to look for if we want to identify the next multi-bagger. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. However, after investigating Lakeland Industries (NASDAQ:LAKE), we don't think it's current trends fit the mold of a multi-bagger.
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. To calculate this metric for Lakeland Industries, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.052 = US$6.5m ÷ (US$145m - US$21m) (Based on the trailing twelve months to April 2023).
So, Lakeland Industries has an ROCE of 5.2%. Ultimately, that's a low return and it under-performs the Luxury industry average of 14%.
See our latest analysis for Lakeland Industries
In the above chart we have measured Lakeland Industries' 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 Lakeland Industries here for free.
The Trend Of ROCE
When we looked at the ROCE trend at Lakeland Industries, we didn't gain much confidence. Around five years ago the returns on capital were 9.8%, but since then they've fallen to 5.2%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
Our Take On Lakeland Industries' ROCE
To conclude, we've found that Lakeland Industries is reinvesting in the business, but returns have been falling. And with the stock having returned a mere 6.3% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.
If you want to continue researching Lakeland Industries, you might be interested to know about the 1 warning sign that our analysis has discovered.
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.
