Returns On Capital Signal Tricky Times Ahead For Lead Real Estate (NASDAQ:LRE)
What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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 Lead Real Estate (NASDAQ:LRE) and its ROCE trend, we weren't exactly thrilled.
Understanding Return On Capital Employed (ROCE)
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Lead Real Estate:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.059 = JP¥559m ÷ (JP¥17b - JP¥8.0b) (Based on the trailing twelve months to December 2023).
Therefore, Lead Real Estate has an ROCE of 5.9%. In absolute terms, that's a low return and it also under-performs the Consumer Durables industry average of 14%.
Check out our latest analysis for Lead Real Estate
Historical performance is a great place to start when researching a stock so above you can see the gauge for Lead Real Estate's ROCE against it's prior returns. If you're interested in investigating Lead Real Estate's past further, check out this free graph covering Lead Real Estate's past earnings, revenue and cash flow.
So How Is Lead Real Estate's ROCE Trending?
In terms of Lead Real Estate's historical ROCE movements, the trend isn't fantastic. Over the last three years, returns on capital have decreased to 5.9% from 10% three years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
On a related note, Lead Real Estate has decreased its current liabilities to 46% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money. Keep in mind 46% is still pretty high, so those risks are still somewhat prevalent.
The Bottom Line
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Lead Real Estate. But since the stock has dived 75% in the last year, there could be other drivers that are influencing the business' outlook. Regardless, reinvestment can pay off in the long run, so we think astute investors may want to look further into this stock.
If you want to know some of the risks facing Lead Real Estate we've found 4 warning signs (2 are potentially serious!) that you should be aware of before investing here.
While Lead Real Estate 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.
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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.