Why We’re Not Impressed By LSI Industries Inc.’s (NASDAQ:LYTS) 3.8% ROCE
Today we are going to look at LSI Industries Inc. (NASDAQ:LYTS) to see whether it might be an attractive investment prospect. In particular, we'll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.
First, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. In general, businesses with a higher ROCE are usually better quality. In brief, it is a useful tool, but it is not without drawbacks. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that 'one dollar invested in the company generates value of more than one dollar'.
How Do You Calculate Return On Capital Employed?
Analysts use this formula to calculate return on capital employed:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
Or for LSI Industries:
0.038 = US$5.4m ÷ (US$182m - US$39m) (Based on the trailing twelve months to March 2020.)
So, LSI Industries has an ROCE of 3.8%.
See our latest analysis for LSI Industries
Is LSI Industries's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. Using our data, LSI Industries's ROCE appears to be significantly below the 10% average in the Electrical industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Independently of how LSI Industries compares to its industry, its ROCE in absolute terms is low; especially compared to the ~2.2% available in government bonds. Readers may wish to look for more rewarding investments.
You can see in the image below how LSI Industries's ROCE compares to its industry. Click to see more on past growth.
Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Since the future is so important for investors, you should check out our free report on analyst forecasts for LSI Industries.
How LSI Industries's Current Liabilities Impact Its ROCE
Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they need to be paid within 12 months. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To counter this, investors can check if a company has high current liabilities relative to total assets.
LSI Industries has total assets of US$182m and current liabilities of US$39m. Therefore its current liabilities are equivalent to approximately 21% of its total assets. This is a modest level of current liabilities, which will have a limited impact on the ROCE.
What We Can Learn From LSI Industries's ROCE
While that is good to see, LSI Industries has a low ROCE and does not look attractive in this analysis. You might be able to find a better investment than LSI Industries. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).
Love or hate this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.
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. Thank you for reading.
