Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at the ROCE trend of James Latham (LON:LTHM) we really liked what we saw.
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. The formula for this calculation on James Latham is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.34 = UK£58m ÷ (UK£225m - UK£53m) (Based on the trailing twelve months to March 2022).
Thus, James Latham has an ROCE of 34%. In absolute terms that's a great return and it's even better than the Trade Distributors industry average of 14%.
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how James Latham has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
So How Is James Latham's ROCE Trending?
The trends we've noticed at James Latham are quite reassuring. The data shows that returns on capital have increased substantially over the last five years to 34%. The amount of capital employed has increased too, by 84%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.
A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what James Latham has. Since the stock has returned a solid 46% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.
On a separate note, we've found 1 warning sign for James Latham you'll probably want to know about.
James Latham 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.
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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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