To find a multi-bagger stock, what are the underlying trends we should look for in a business? In a perfect world, we’d like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it’s a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating LVMH Moët Hennessy – Louis Vuitton Société Européenne (EPA:MC), we don’t think it’s current trends fit the mold of a multi-bagger.
Return On Capital Employed (ROCE): What is it?
If you haven’t worked with ROCE before, it measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for LVMH Moët Hennessy – Louis Vuitton Société Européenne, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.098 = €7.9b ÷ (€104b – €23b) (Based on the trailing twelve months to June 2020).
Thus, LVMH Moët Hennessy – Louis Vuitton Société Européenne has an ROCE of 9.8%. In absolute terms, that’s a low return but it’s around the Luxury industry average of 12%.
View our latest analysis for LVMH Moët Hennessy – Louis Vuitton Société Européenne
Above you can see how the current ROCE for LVMH Moët Hennessy – Louis Vuitton Société Européenne 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 LVMH Moët Hennessy – Louis Vuitton Société Européenne.
What The Trend Of ROCE Can Tell Us
When we looked at the ROCE trend at LVMH Moët Hennessy – Louis Vuitton Société Européenne, we didn’t gain much confidence. Over the last five years, returns on capital have decreased to 9.8% from 14% five years ago. Meanwhile, the business is utilizing more capital but this hasn’t moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.
What We Can Learn From LVMH Moët Hennessy – Louis Vuitton Société Européenne’s ROCE
Bringing it all together, while we’re somewhat encouraged by LVMH Moët Hennessy – Louis Vuitton Société Européenne’s reinvestment in its own business, we’re aware that returns are shrinking. Investors must think there’s better things to come because the stock has knocked it out of the park delivering a 171% gain to shareholders who have held over the last five years. Ultimately, if the underlying trends persist, we wouldn’t hold our breath on it being a multi-bagger going forward.
LVMH Moët Hennessy – Louis Vuitton Société Européenne does have some risks though, and we’ve spotted 1 warning sign for LVMH Moët Hennessy – Louis Vuitton Société Européenne that you might be interested in.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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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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The Returns At LVMH Moët Hennessy – Louis Vuitton Société Européenne (EPA:MC) Provide Us With Signs Of What’s To Come - Simply Wall St
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