Luna Innovations' (NASDAQ:LUNA) Returns On Capital Are Heading Higher
What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. So on that note, Luna Innovations (NASDAQ:LUNA) looks quite promising in regards to its trends of return on capital.
Understanding 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. To calculate this metric for Luna Innovations, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.029 = US$2.8m ÷ (US$130m - US$34m) (Based on the trailing twelve months to September 2021).
Thus, Luna Innovations has an ROCE of 2.9%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 10.0%.
View our latest analysis for Luna Innovations
Above you can see how the current ROCE for Luna Innovations compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Luna Innovations.
How Are Returns Trending?
The fact that Luna Innovations is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses five years ago, but now it's earning 2.9% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Luna Innovations is utilizing 146% more capital than it was five years ago. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.
The Key Takeaway
Long story short, we're delighted to see that Luna Innovations' reinvestment activities have paid off and the company is now profitable. Since the stock has returned a staggering 427% to shareholders over the last five years, it looks like investors are recognizing these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.
One more thing, we've spotted 3 warning signs facing Luna Innovations 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.
