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. 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. With that in mind, the ROCE of Limbach Holdings (NASDAQ:LMB) looks great, so lets see what the trend can tell us.

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. To calculate this metric for Limbach Holdings, this is the formula:

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

0.21 = US$34m ÷ (US$289m - US$124m) (Based on the trailing twelve months to March 2024).

So, Limbach Holdings has an ROCE of 21%. That's a fantastic return and not only that, it outpaces the average of 11% earned by companies in a similar industry.

In the above chart we have measured Limbach Holdings' 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 Limbach Holdings for free.

What Does the ROCE Trend For Limbach Holdings Tell Us?

Limbach Holdings is displaying some positive trends. The data shows that returns on capital have increased substantially over the last five years to 21%. 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 95%. 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, Limbach Holdings has decreased current liabilities to 43% 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.

What We Can Learn From Limbach Holdings' ROCE

In summary, it's great to see that Limbach Holdings can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And a remarkable 581% 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 Limbach Holdings can keep these trends up, it could have a bright future ahead.

If you'd like to know about the risks facing Limbach Holdings, we've discovered 2 warning signs that you should be aware of.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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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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