There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. Although, when we looked at Lancaster Colony (NASDAQ:LANC), it didn't seem to tick all of these boxes.
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 Lancaster Colony is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.19 = US$173m ÷ (US$1.1b - US$141m) (Based on the trailing twelve months to December 2020).
Therefore, Lancaster Colony has an ROCE of 19%. On its own, that's a standard return, however it's much better than the 8.4% generated by the Food industry.
In the above chart we have measured Lancaster Colony's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Lancaster Colony.
So How Is Lancaster Colony's ROCE Trending?
When we looked at the ROCE trend at Lancaster Colony, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 19% from 31% five years ago. However it looks like Lancaster Colony might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
The Key Takeaway
To conclude, we've found that Lancaster Colony is reinvesting in the business, but returns have been falling. Since the stock has gained an impressive 75% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.
One more thing, we've spotted 1 warning sign facing Lancaster Colony that you might find interesting.
While Lancaster Colony may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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