Locality Planning Energy Holdings (ASX: LPE) could have the makings of a multi-bagger
What are the first trends to look for to identify a title that could multiply over the long term? Among other things, we’ll want to see two things; first, a growth to recover on capital employed (ROCE) and on the other hand, an expansion of the amount capital employed. Basically, it means that a business has profitable initiatives that it can keep reinvesting in, which is a hallmark of a dialing machine. So on that note, Development of the Energy Holdings community (ASX: LPE) looks pretty promising when it comes to its ROI trends.
What is Return on Employee Capital (ROCE)?
If you’ve never worked with ROCE before, it measures the “return” (profit before tax) that a business generates on capital employed in its business. The formula for this calculation on Locality Planning Energy Holdings is:
Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)
0.15 = 2.5 million Australian dollars ÷ (29 million Australian dollars – 13 million Australian dollars) (Based on the last twelve months up to June 2021).
Therefore, Locality Planning Energy Holdings has a ROCE of 15%. In absolute terms, this is a satisfactory performance, but compared to the electric utility sector average of 6.1%, it is much better.
Check out our latest analysis for Locality Planning Energy Holdings
In the chart above, we measured Locality Planning Energy Holdings’ past ROCE against its past performance, but arguably the future is more important. If you are interested, you can view analyst forecasts in our free analyst forecast report for the company.
What the ROCE trend can tell us
We are delighted to see that Locality Planning Energy Holdings is reaping the rewards of its investments and is now generating pre-tax profits. Shareholders will no doubt be delighted because the company was in deficit five years ago but now generates 15% of its capital. And unsurprisingly, like most companies trying to break into the dark, Locality Planning Energy Holdings is using 262% more equity than five years ago. This may indicate that there are many opportunities to invest capital internally and at ever higher rates, two common characteristics of a multi-bagger.
For the record, there was a noticeable increase in the company’s current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially, the business now has short-term suppliers or creditors funding about 44% of its operations, which is not ideal. And with current liabilities at these levels, it’s pretty high.
The bottom line
To the delight of most shareholders, Locality Planning Energy Holdings has now returned to profitability. And as the stock has plunged 87% in the past five years, other factors may affect the company’s outlook. Either way, we believe the economic trends for this company are positive and that a closer look at the stock could prove to be rewarding.
On a final note, we found 6 warning signs for Locality Planning Energy Holdings (4 make us uncomfortable), you should be aware of this.
For those who like to invest in solid companies, Check it out free list of companies with strong balance sheets and high returns on equity.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
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