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The Returns On Capital At Lincoln Electric Holdings (NASDAQ:LECO) Don't Inspire Confidence

Simply Wall St
·3 mins read

When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. Having said that, after a brief look, Lincoln Electric Holdings (NASDAQ:LECO) we aren't filled with optimism, but let's investigate further.

Return On Capital Employed (ROCE): What is it?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Lincoln Electric Holdings is:

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

0.21 = US$345m ÷ (US$2.2b - US$569m) (Based on the trailing twelve months to June 2020).

So, Lincoln Electric Holdings has an ROCE of 21%. That's a fantastic return and not only that, it outpaces the average of 9.2% earned by companies in a similar industry.

See our latest analysis for Lincoln Electric Holdings

roce
roce

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 to see what analysts are forecasting going forward, you should check out our free report for Lincoln Electric Holdings.

What The Trend Of ROCE Can Tell Us

There is reason to be cautious about Lincoln Electric Holdings, given the returns are trending downwards. To be more specific, the ROCE was 30% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. If these trends continue, we wouldn't expect Lincoln Electric Holdings to turn into a multi-bagger.

The Bottom Line On Lincoln Electric Holdings' ROCE

In summary, it's unfortunate that Lincoln Electric Holdings is generating lower returns from the same amount of capital. However the stock has delivered a 94% return to shareholders over the last five years, so investors might be expecting the trends to turn around. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

If you'd like to know about the risks facing Lincoln Electric Holdings, we've discovered 2 warning signs that you should be aware of.

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.

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@simplywallst.com.