If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at the ROCE trend of Lycopodium (ASX:LYL) we really liked what we saw.

What is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Lycopodium is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.33 = AU$36m ÷ (AU$195m - AU$86m) (Based on the trailing twelve months to December 2021).

Thus, Lycopodium has an ROCE of 33%.  That's a fantastic return and not only that, it outpaces the average of 14% earned by companies in a similar industry.

View our latest analysis for Lycopodium  roce

Historical performance is a great place to start when researching a stock so above you can see the gauge for Lycopodium's ROCE against it's prior returns. If you'd like to look at how Lycopodium has performed in the past in other metrics, you can view this freegraph of past earnings, revenue and cash flow.

How Are Returns Trending?

We like the trends that we're seeing from Lycopodium. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 33%. Basically the business is earning more per dollar of capital invested and in addition to that, 58% more capital is being employed now too. So we're very much inspired by what we're seeing at Lycopodium thanks to its ability to profitably reinvest capital.

On a separate but related note, it's important to know that Lycopodium has a current liabilities to total assets ratio of 44%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.



The Bottom Line

All in all, it's terrific to see that Lycopodium is reaping the rewards from prior investments and is growing its capital base. And a remarkable 132% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Lycopodium can keep these trends up, it could have a bright future ahead.

If you'd like to know about the risks facing Lycopodium, we've discovered 2 warning signs that you should be aware of.

Lycopodium 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.

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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