What trends should we look for if we want to identify stocks that can multiply in value over the long term? First, we’ll want to see proof come back on capital employed (ROCE) which is increasing, and on the other hand, a base capital employed. If you see this, it usually means it’s a company with a great business model and lots of profitable reinvestment opportunities. With this in mind, the ROCE of At Leslie’s (NASDAQ:LESL) looks attractive right now, so let’s see what the trend in returns can tell us.
What is return on capital employed (ROCE)?
Just to clarify if you’re not sure, ROCE is a measure of the pre-tax income (as a percentage) that a business earns on the capital invested in its business. The formula of this calculation on that of Leslie is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.41 = $226 million ÷ ($811 million – $254 million) (Based on the last twelve months to January 2022).
Therefore, Leslie’s has a ROCE of 41%. This is a fantastic return and not only that, it exceeds the 18% average earned by companies in a similar industry.
See our latest review for Leslie’s
In the chart above, we’ve measured Leslie’s past ROCE against his past performance, but the future is arguably more important. If you wish, you can view analyst forecasts covering Leslie’s here for free.
The ROCE trend
We’d rather be happy with a return on capital like Leslie’s. Over the past three years, ROCE has remained relatively stable at around 41% and the company has deployed 77% more capital into its operations. With such high returns, it’s great that the company can continually reinvest its money at such attractive rates of return. If Leslie’s can continue like this, we would be very optimistic about its future.
Our view on Leslie’s ROCE
Leslie’s has demonstrated its competence in generating high returns on increasing amounts of capital employed, which we are delighted with. Still, over the past year, the stock is down 33%, so the drop could provide an opening. For this reason, savvy investors may want to dig into this company in case it is a top investment.
Leslie’s has risks, we noticed 2 warning signs (and 1 that makes us a little uneasy) we think you should know.
High yields are a key ingredient to strong performance, so check out our free list of stocks generating high returns on equity with strong balance sheets.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.