In This Article:
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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in AJ Lucas Group's (ASX:AJL) returns on capital, so let's have a look.
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 AJ Lucas Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.083 = AU$17m ÷ (AU$276m - AU$68m) (Based on the trailing twelve months to December 2019).
Thus, AJ Lucas Group has an ROCE of 8.3%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 12%.
Check out our latest analysis for AJ Lucas Group
Historical performance is a great place to start when researching a stock so above you can see the gauge for AJ Lucas Group's ROCE against it's prior returns. If you'd like to look at how AJ Lucas Group has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
How Are Returns Trending?
AJ Lucas Group has broken into the black (profitability) and we're sure it's a sight for sore eyes. The company now earns 8.3% on its capital, because five years ago it was incurring losses. While returns have increased, the amount of capital employed by AJ Lucas Group has remained flat over the period. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. Because in the end, a business can only get so efficient.
The Bottom Line On AJ Lucas Group's ROCE
In summary, we're delighted to see that AJ Lucas Group has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And since the stock has dived 91% 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.