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LBG Media (LON:LBG) Is Reinvesting At Lower Rates Of Return

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. However, after briefly looking over the numbers, we don't think LBG Media (LON:LBG) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What Is It?

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 LBG Media is:

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

0.15 = UK£9.6m ÷ (UK£72m - UK£8.4m) (Based on the trailing twelve months to June 2023).

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Thus, LBG Media has an ROCE of 15%. By itself that's a normal return on capital and it's in line with the industry's average returns of 15%.

View our latest analysis for LBG Media

roce
AIM:LBG Return on Capital Employed January 17th 2024

Above you can see how the current ROCE for LBG Media 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 LBG Media.

What Does the ROCE Trend For LBG Media Tell Us?

On the surface, the trend of ROCE at LBG Media doesn't inspire confidence. Around five years ago the returns on capital were 37%, but since then they've fallen to 15%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, LBG Media has done well to pay down its current liabilities to 12% 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.

Our Take On LBG Media's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for LBG Media. These growth trends haven't led to growth returns though, since the stock has fallen 32% over the last year. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Like most companies, LBG Media does come with some risks, and we've found 1 warning sign that you should be aware of.

While LBG Media 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.