Some Investors May Be Worried About Lakeland Industries' (NASDAQ:LAKE) Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Lakeland Industries (NASDAQ:LAKE) and its ROCE trend, we weren't exactly thrilled.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Lakeland Industries is:

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

0.053 = US$6.6m ÷ (US$136m - US$13m) (Based on the trailing twelve months to October 2022).

Thus, Lakeland Industries has an ROCE of 5.3%. In absolute terms, that's a low return and it also under-performs the Luxury industry average of 18%.

View our latest analysis for Lakeland Industries

Above you can see how the current ROCE for Lakeland Industries compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Lakeland Industries here for free.

How Are Returns Trending?

When we looked at the ROCE trend at Lakeland Industries, we didn't gain much confidence. Around five years ago the returns on capital were 11%, but since then they've fallen to 5.3%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

The Bottom Line On Lakeland Industries' ROCE

In summary, we're somewhat concerned by Lakeland Industries' diminishing returns on increasing amounts of capital. In spite of that, the stock has delivered a 18% return to shareholders who held over the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

One more thing to note, we've identified 1 warning sign with Lakeland Industries and understanding this should be part of your investment process.

While Lakeland Industries 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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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