If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we’ll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it’s a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Linamar (TSE:LNR) and its ROCE trend, we weren’t exactly thrilled.
What Is Return On Capital Employed (ROCE)?
If you haven’t worked with ROCE before, it measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Linamar:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.10 = CA$743m ÷ (CA$9.6b – CA$2.4b) (Based on the trailing twelve months to September 2023).
Thus, Linamar has an ROCE of 10%. That’s a relatively normal return on capital, and it’s around the 11% generated by the Auto Components industry.
Check out our latest analysis for Linamar
In the above chart we have measured Linamar’s prior ROCE against its prior performance, but the future is arguably more important. If you’d like, you can check out the forecasts from the analysts covering Linamar for free.
What Does the ROCE Trend For Linamar Tell Us?
Things have been pretty stable at Linamar, with its capital employed and returns on that capital staying somewhat the same for the last five years. It’s not uncommon to see this when looking at a mature and stable business that isn’t re-investing its earnings because it has likely passed that phase of the business cycle. With that in mind, unless investment picks up again in the future, we wouldn’t expect Linamar to be a multi-bagger going forward.
In Conclusion…
In summary, Linamar isn’t compounding its earnings but is generating stable returns on the same amount of capital employed. Unsurprisingly, the stock has only gained 36% over the last five years, which potentially indicates that investors are accounting for this going forward. So if you’re looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.
If you want to continue researching Linamar, you might be interested to know about the 1 warning sign that our analysis has discovered.
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.