Liberty Latin America (NASDAQ:LILA) Has Some Way To Go To Become A Multi-Bagger
What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Liberty Latin America (NASDAQ:LILA), it didn't seem to tick all of these boxes.
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. The formula for this calculation on Liberty Latin America is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.056 = US$751m ÷ (US$15b - US$1.5b) (Based on the trailing twelve months to June 2022).
Therefore, Liberty Latin America has an ROCE of 5.6%. Ultimately, that's a low return and it under-performs the Telecom industry average of 8.3%.
Check out our latest analysis for Liberty Latin America
Above you can see how the current ROCE for Liberty Latin America 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 Liberty Latin America here for free.
What Can We Tell From Liberty Latin America's ROCE Trend?
Over the past five years, Liberty Latin America's ROCE and capital employed have both remained mostly flat. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So don't be surprised if Liberty Latin America doesn't end up being a multi-bagger in a few years time.
The Bottom Line
We can conclude that in regards to Liberty Latin America's returns on capital employed and the trends, there isn't much change to report on. Since the stock has declined 62% over the last three years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Liberty Latin America has the makings of a multi-bagger.
If you're still interested in Liberty Latin America it's worth checking out our FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.
While Liberty Latin America may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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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