If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we’ll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it’s a company with a great business model and plenty of profitable reinvestment opportunities. So, when we ran our eye over L&T Technology Services’ (NSE:LTTS) trend of ROCE, we really liked what we saw.
Understanding 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 L&T Technology Services:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.27 = ₹13b ÷ (₹63b – ₹14b) (Based on the trailing twelve months to September 2022).
Thus, L&T Technology Services has an ROCE of 27%. That’s a fantastic return and not only that, it outpaces the average of 12% earned by companies in a similar industry.
Check out our latest analysis for L&T Technology Services
In the above chart we have measured L&T Technology Services’ 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 L&T Technology Services here for free.
What Can We Tell From L&T Technology Services’ ROCE Trend?
In terms of L&T Technology Services’ history of ROCE, it’s quite impressive. The company has consistently earned 27% for the last five years, and the capital employed within the business has risen 186% in that time. Now considering ROCE is an attractive 27%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. If these trends can continue, it wouldn’t surprise us if the company became a multi-bagger.
Our Take On L&T Technology Services’ ROCE
In short, we’d argue L&T Technology Services has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. And the stock has done incredibly well with a 267% return over the last five years, so long term investors are no doubt ecstatic with that result. So even though the stock might be more “expensive” than it was before, we think the strong fundamentals warrant this stock for further research.
Like most companies, L&T Technology Services does come with some risks, and we’ve found 2 warning signs that you should be aware of.
High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.
Valuation is complex, but we’re helping make it simple.
Find out whether L&T Technology Services is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.
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.