If you’re looking for a multi-bagger, there’s a few things to keep an eye out for. Firstly, we’d want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. However, after investigating Lear (NYSE:LEA), we don’t think it’s current trends fit the mold of a multi-bagger.
Return On Capital Employed (ROCE): What Is It?
If you haven’t worked with ROCE before, it measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Lear, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.12 = US$1.0b ÷ (US$15b – US$5.7b) (Based on the trailing twelve months to September 2023).
Therefore, Lear has an ROCE of 12%. In absolute terms, that’s a pretty normal return, and it’s somewhat close to the Auto Components industry average of 13%.
See our latest analysis for Lear
In the above chart we have measured Lear’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 Lear.
The Trend Of ROCE
On the surface, the trend of ROCE at Lear doesn’t inspire confidence. To be more specific, ROCE has fallen from 24% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.
The Bottom Line On Lear’s ROCE
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Lear. These trends are starting to be recognized by investors since the stock has delivered a 3.1% gain to shareholders who’ve held over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.
One more thing, we’ve spotted 1 warning sign facing Lear that you might find interesting.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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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.