Locality Planning Energy Holdings (ASX:LPE) Is Very Good At Capital Allocation
If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at the ROCE trend of Locality Planning Energy Holdings (ASX:LPE) we really liked what we saw.
What Is Return On Capital Employed (ROCE)?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Locality Planning Energy Holdings is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.40 = AU$8.5m ÷ (AU$52m - AU$31m) (Based on the trailing twelve months to June 2022).
So, Locality Planning Energy Holdings has an ROCE of 40%. That's a fantastic return and not only that, it outpaces the average of 5.5% earned by companies in a similar industry.
See our latest analysis for Locality Planning Energy Holdings
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Locality Planning Energy Holdings' past further, check out this free graph of past earnings, revenue and cash flow.
What Can We Tell From Locality Planning Energy Holdings' ROCE Trend?
Locality Planning Energy Holdings has recently broken into profitability so their prior investments seem to be paying off. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 40% on its capital. Not only that, but the company is utilizing 144% more capital than before, but that's to be expected from a company trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.
On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 59% of its operations, which isn't ideal. And with current liabilities at those levels, that's pretty high.
The Bottom Line
Overall, Locality Planning Energy Holdings gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. Although the company may be facing some issues elsewhere since the stock has plunged 95% in the last five years. In any case, we believe the economic trends of this company are positive and looking into the stock further could prove rewarding.
One more thing, we've spotted 4 warning signs facing Locality Planning Energy Holdings that you might find interesting.
If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning 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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