When looking for companies with the potential to become multi-baggers, investors often focus on financial metrics such as returns on capital employed (ROCE). A growing ROCE in combination with an increasing amount of capital employed indicates a business that is effectively compounding its earnings. However, after examining La-Z-Boy (NYSE:LZB), it seems that the company’s current trends do not align with those of a potential multi-bagger.
ROCE measures the pre-tax profit generated by a company in relation to the capital employed in its business. In the case of La-Z-Boy, the formula for calculating ROCE is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
Based on the trailing twelve months to July 2023, La-Z-Boy has an ROCE of 13%. While this is a relatively normal return on capital, it falls below the average of 15% for the Consumer Durables industry.
An analysis of La-Z-Boy’s ROCE trend reveals a decline from 19% approximately five years ago to the current 13%. In contrast, the company has been deploying more capital, but this has had little impact on sales over the past 12 months. These investments may require more time before they start yielding significant changes in earnings.
Considering the declining returns and the relatively low stock performance with only a 8.7% total return to shareholders over the last five years, investors may want to explore other options for potential multi-baggers. While La-Z-Boy continues to reinvest in its business, the underlying trends suggest better opportunities elsewhere.
Sources: Simply Wall St