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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Lichen China (NASDAQ:LICN) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Lichen China:

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

0.16 = US$11m ÷ (US$73m - US$2.8m) (Based on the trailing twelve months to June 2024).

So, Lichen China has an ROCE of 16%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Professional Services industry average of 14%.

See our latest analysis for Lichen China

Historical performance is a great place to start when researching a stock so above you can see the gauge for Lichen China's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Lichen China.

What Does the ROCE Trend For Lichen China Tell Us?

The trend of ROCE doesn't look fantastic because it's fallen from 36% four years ago, while the business's capital employed increased by 172%. That being said, Lichen China raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Lichen China might not have received a full period of earnings contribution from it.

On a side note, Lichen China has done well to pay down its current liabilities to 3.9% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

In Conclusion...

In summary, despite lower returns in the short term, we're encouraged to see that Lichen China is reinvesting for growth and has higher sales as a result. Furthermore the stock has climbed 27% over the last year, it would appear that investors are upbeat about the future. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

One more thing: We've identified 4 warning signs with Lichen China (at least 1 which can't be ignored) , and understanding these would certainly be useful.

While Lichen China isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.