Our Take On The Returns On Capital At London Security (LON:LSC)
If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. That's why when we briefly looked at London Security's (LON:LSC) ROCE trend, we were pretty happy with what we saw.
Understanding 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. The formula for this calculation on London Security is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.19 = UK£24m ÷ (UK£156m - UK£27m) (Based on the trailing twelve months to December 2019).
Therefore, London Security has an ROCE of 19%. In absolute terms, that's a satisfactory return, but compared to the Machinery industry average of 12% it's much better.
See our latest analysis for London Security
Historical performance is a great place to start when researching a stock so above you can see the gauge for London Security's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of London Security, check out these free graphs here.
How Are Returns Trending?
While the returns on capital are good, they haven't moved much. Over the past five years, ROCE has remained relatively flat at around 19% and the business has deployed 24% more capital into its operations. 19% is a pretty standard return, and it provides some comfort knowing that London Security has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.
The Bottom Line
In the end, London Security has proven its ability to adequately reinvest capital at good rates of return. In light of this, the stock has only gained 17% over the last five years for shareholders who have owned the stock in this period. So because of the trends we're seeing, we'd recommend looking further into this stock to see if it has the makings of a multi-bagger.
London Security does have some risks though, and we've spotted 1 warning sign for London Security that you might be interested in.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
This article by Simply Wall St is general in nature. 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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