There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. And in light of that, the trends we're seeing at Lockheed Martin's (NYSE:LMT) look very promising so lets take a look.
Understanding Return On Capital Employed (ROCE)
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Lockheed Martin is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.24 = US$8.3b ÷ (US$50b - US$15b) (Based on the trailing twelve months to June 2020).
Therefore, Lockheed Martin has an ROCE of 24%. That's a fantastic return and not only that, it outpaces the average of 9.6% earned by companies in a similar industry.
In the above chart we have a measured Lockheed Martin's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Lockheed Martin here for free.
How Are Returns Trending?
Investors would be pleased with what's happening at Lockheed Martin. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 24%. Basically the business is earning more per dollar of capital invested and in addition to that, 28% more capital is being employed now too. So we're very much inspired by what we're seeing at Lockheed Martin thanks to its ability to profitably reinvest capital.
A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Lockheed Martin has. And a remarkable 105% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Lockheed Martin can keep these trends up, it could have a bright future ahead.
If you'd like to know about the risks facing Lockheed Martin, we've discovered 1 warning sign that you should be aware of.
High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.
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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