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There Are Reasons To Feel Uneasy About Lincoln Electric Holdings' (NASDAQ:LECO) Returns On Capital

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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. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, while the ROCE is currently high for Lincoln Electric Holdings (NASDAQ:LECO), we aren't jumping out of our chairs because returns are decreasing.

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 Lincoln Electric Holdings, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.21 = US$388m ÷ (US$2.5b - US$696m) (Based on the trailing twelve months to June 2021).

Thus, Lincoln Electric Holdings has an ROCE of 21%. In absolute terms that's a great return and it's even better than the Machinery industry average of 9.6%.

See our latest analysis for Lincoln Electric Holdings

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Above you can see how the current ROCE for Lincoln Electric Holdings 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 Lincoln Electric Holdings here for free.

What Can We Tell From Lincoln Electric Holdings' ROCE Trend?

When we looked at the ROCE trend at Lincoln Electric Holdings, we didn't gain much confidence. While it's comforting that the ROCE is high, five years ago it was 29%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line On Lincoln Electric Holdings' ROCE

To conclude, we've found that Lincoln Electric Holdings is reinvesting in the business, but returns have been falling. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 142% gain to shareholders who have held over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

Lincoln Electric Holdings does have some risks though, and we've spotted 2 warning signs for Lincoln Electric Holdings that you might be interested in.

Lincoln Electric Holdings is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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