There are a few key trends to look for if we want to identify the next multi-bagger. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in Lakeland Industries' (NASDAQ:LAKE) returns on capital, so let's have a look.
What is 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)
0.32 = US$36m ÷ (US$132m - US$17m) (Based on the trailing twelve months to October 2020).
Thus, Lakeland Industries has an ROCE of 32%. In absolute terms that's a great return and it's even better than the Luxury industry average of 15%.
Above you can see how the current ROCE for Lakeland Industries compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Lakeland Industries here for free.
What Does the ROCE Trend For Lakeland Industries Tell Us?
Investors would be pleased with what's happening at Lakeland Industries. Over the last five years, returns on capital employed have risen substantially to 32%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 64%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.
In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 13%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.
The Bottom Line On Lakeland Industries' ROCE
All in all, it's terrific to see that Lakeland Industries is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a staggering 117% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
If you'd like to know more about Lakeland Industries, we've spotted 3 warning signs, and 1 of them is potentially serious.
If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.
This article by Simply Wall St is general in nature. 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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