We Think Locality Planning Energy Holdings (ASX:LPE) Might Have The DNA Of A Multi-Bagger
To find a multi-bagger stock, what are the underlying trends we should look for in a business? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. And in light of that, the trends we're seeing at Locality Planning Energy Holdings' (ASX:LPE) look very promising so lets take a look.
Return On Capital Employed (ROCE): What Is It?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Locality Planning Energy Holdings is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.42 = AU$8.9m ÷ (AU$52m - AU$31m) (Based on the trailing twelve months to June 2022).
Therefore, Locality Planning Energy Holdings has an ROCE of 42%. In absolute terms that's a great return and it's even better than the Electric Utilities industry average of 5.5%.
View our latest analysis for Locality Planning Energy Holdings
Historical performance is a great place to start when researching a stock so above you can see the gauge for Locality Planning Energy Holdings' ROCE against it's prior returns. If you're interested in investigating Locality Planning Energy Holdings' past further, check out this free graph of past earnings, revenue and cash flow.
What Can We Tell From Locality Planning Energy Holdings' ROCE Trend?
The fact that Locality Planning Energy Holdings 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 42% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Locality Planning Energy Holdings is utilizing 143% more capital than it was five years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.
For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 59% of its operations, which isn't ideal. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.
The Bottom Line On Locality Planning Energy Holdings' ROCE
To the delight of most shareholders, Locality Planning Energy Holdings has now broken into profitability. And since the stock has dived 95% over the last five years, there may be other factors affecting the company's prospects. In any case, we believe the economic trends of this company are positive and looking into the stock further could prove rewarding.
One final note, you should learn about the 5 warning signs we've spotted with Locality Planning Energy Holdings (including 4 which are significant) .
If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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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