Lakeland Industries' (NASDAQ:LAKE) Returns On Capital Not Reflecting Well On The Business
To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Lakeland Industries (NASDAQ:LAKE), it didn't seem to tick all of these boxes.
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)
0.085 = US$11m ÷ (US$143m - US$14m) (Based on the trailing twelve months to April 2022).
Therefore, Lakeland Industries has an ROCE of 8.5%. Ultimately, that's a low return and it under-performs the Luxury industry average of 15%.
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. Over the last five years, returns on capital have decreased to 8.5% from 13% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.
What We Can Learn From Lakeland Industries' ROCE
In summary, we're somewhat concerned by Lakeland Industries' diminishing returns on increasing amounts of capital. Investors must expect better things on the horizon though because the stock has risen 7.9% in the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.
One more thing, we've spotted 1 warning sign facing Lakeland Industries that you might find interesting.
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.
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