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Lumber Liquidators Holdings (NYSE:LL) Is Looking To Continue Growing Its Returns On Capital

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  • LL

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at Lumber Liquidators Holdings (NYSE:LL) and its trend of ROCE, 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. To calculate this metric for Lumber Liquidators Holdings, this is the formula:

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

0.19 = US$71m ÷ (US$600m - US$230m) (Based on the trailing twelve months to September 2021).

Thus, Lumber Liquidators Holdings has an ROCE of 19%. That's a relatively normal return on capital, and it's around the 20% generated by the Specialty Retail industry.

View our latest analysis for Lumber Liquidators Holdings

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Above you can see how the current ROCE for Lumber Liquidators Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Lumber Liquidators Holdings.

What Can We Tell From Lumber Liquidators Holdings' ROCE Trend?

We're delighted to see that Lumber Liquidators Holdings is reaping rewards from its investments and is now generating some pre-tax profits. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 19% on its capital. In addition to that, Lumber Liquidators Holdings is employing 33% more capital than previously which is expected of a company that's trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

Our Take On Lumber Liquidators Holdings' ROCE

To the delight of most shareholders, Lumber Liquidators Holdings has now broken into profitability. And since the stock has fallen 14% over the last five years, there might be an opportunity here. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

On a final note, we found 3 warning signs for Lumber Liquidators Holdings (2 make us uncomfortable) you should be aware of.

While Lumber Liquidators Holdings 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.

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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