Returns On Capital At Lancaster Colony (NASDAQ:LANC) Paint A Concerning Picture
If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Lancaster Colony (NASDAQ:LANC) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
Return On Capital Employed (ROCE): What is it?
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 Lancaster Colony is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.20 = US$181m ÷ (US$1.1b - US$152m) (Based on the trailing twelve months to March 2021).
So, Lancaster Colony has an ROCE of 20%. On its own, that's a standard return, however it's much better than the 10% generated by the Food industry.
Check out our latest analysis for Lancaster Colony
Above you can see how the current ROCE for Lancaster Colony compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
The Trend Of ROCE
In terms of Lancaster Colony's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 20% from 33% five years ago. However it looks like Lancaster Colony might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
The Bottom Line On Lancaster Colony's ROCE
In summary, Lancaster Colony is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has gained an impressive 67% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.
Lancaster Colony could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation on our platform quite valuable.
While Lancaster Colony isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
This article by Simply Wall St is general in nature. 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
