LKQ (NASDAQ:LKQ) Might Have The Makings Of A Multi-Bagger

Simply Wall St · 03/25 10:53

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at LKQ (NASDAQ:LKQ) so let's look a bit deeper.

Return On Capital Employed (ROCE): What Is It?

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 LKQ is:

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

0.12 = US$1.4b ÷ (US$15b - US$3.3b) (Based on the trailing twelve months to December 2023).

Thus, LKQ has an ROCE of 12%. In isolation, that's a pretty standard return but against the Retail Distributors industry average of 18%, it's not as good.

Check out our latest analysis for LKQ

NasdaqGS:LKQ Return on Capital Employed March 25th 2024

Above you can see how the current ROCE for LKQ 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 analyst report for LKQ .

How Are Returns Trending?

The trends we've noticed at LKQ are quite reassuring. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 12%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 21%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

Our Take On LKQ's ROCE

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 LKQ has. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 90% return over the last five years. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

Like most companies, LKQ does come with some risks, and we've found 3 warning signs that you should be aware of.

While LKQ 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.