There's Been No Shortage Of Growth Recently For Lead Real Estate's (NASDAQ:LRE) Returns On Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So on that note, Lead Real Estate (NASDAQ:LRE) looks quite promising in regards to its trends of return on capital.

What Is 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. Analysts use this formula to calculate it for Lead Real Estate:

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

0.097 = JP¥899m ÷ (JP¥17b - JP¥8.0b) (Based on the trailing twelve months to June 2024).

Thus, Lead Real Estate has an ROCE of 9.7%. Ultimately, that's a low return and it under-performs the Consumer Durables industry average of 14%.

See our latest analysis for Lead Real Estate

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Lead Real Estate has performed in the past in other metrics, you can view this free graph of Lead Real Estate's past earnings, revenue and cash flow.

The Trend Of ROCE

While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. The numbers show that in the last four years, the returns generated on capital employed have grown considerably to 9.7%. The amount of capital employed has increased too, by 245%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

One more thing to note, Lead Real Estate has decreased current liabilities to 46% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books. Nevertheless, there are some potential risks the company is bearing with current liabilities that high, so just keep that in mind.

The Key Takeaway

To sum it up, Lead Real Estate has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Given the stock has declined 61% in the last year, this could be a good investment if the valuation and other metrics are also appealing. So researching this company further and determining whether or not these trends will continue seems justified.

Lead Real Estate does have some risks, we noticed 3 warning signs (and 1 which is a bit unpleasant) we think you should know about.

While Lead Real Estate 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.

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