Returns At LKQ (NASDAQ:LKQ) Are On The Way Up
What are the early trends we should look for to identify a stock that could multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in LKQ's (NASDAQ:LKQ) returns on capital, so let's have a 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. To calculate this metric for LKQ, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.14 = US$1.5b ÷ (US$13b - US$2.4b) (Based on the trailing twelve months to March 2023).
So, LKQ has an ROCE of 14%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Retail Distributors industry average of 17%.
Check out our latest analysis for LKQ
Above you can see how the current ROCE for LKQ 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 LKQ.
What The Trend Of ROCE Can Tell Us
The trends we've noticed at LKQ are quite reassuring. The data shows that returns on capital have increased substantially over the last five years to 14%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 24%. So we're very much inspired by what we're seeing at LKQ thanks to its ability to profitably reinvest capital.
What We Can Learn From LKQ's ROCE
All in all, it's terrific to see that LKQ is reaping the rewards from prior investments and is growing its capital base. And with a respectable 70% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. In light of that, we think it's worth looking further into this stock because if LKQ can keep these trends up, it could have a bright future ahead.
On a final note, we've found 2 warning signs for LKQ that we think you should be aware of.
While LKQ isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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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