Leidos Holdings' (NYSE:LDOS) Returns Have Hit A Wall

May 05, 2023

Stock Analysis

There are a few key trends to look for if we want to identify the next multi-bagger. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So, when we ran our eye over Leidos Holdings' (NYSE:LDOS) trend of ROCE, we liked what we saw.

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

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

0.11 = US$1.1b ÷ (US$13b - US$3.2b) (Based on the trailing twelve months to March 2023).

Thus, Leidos Holdings has an ROCE of 11%. That's a relatively normal return on capital, and it's around the 12% generated by the Professional Services industry.

View our latest analysis for Leidos Holdings

In the above chart we have measured Leidos 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 Leidos Holdings here for free.

While the returns on capital are good, they haven't moved much. The company has consistently earned 11% for the last five years, and the capital employed within the business has risen 46% in that time. 11% is a pretty standard return, and it provides some comfort knowing that Leidos Holdings has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

The main thing to remember is that Leidos Holdings has proven its ability to continually reinvest at respectable rates of return. And the stock has followed suit returning a meaningful 45% to shareholders over the last five years. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

If you want to know some of the risks facing Leidos Holdings we've found 2 warning signs (1 is a bit concerning!) that you should be aware of before investing here.

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.

What are the risks and opportunities for Leidos Holdings?

NYSE:LDOS

Leidos Holdings

Leidos Holdings, Inc., together with its subsidiaries, provides services and solutions in the defense, intelligence, civil, and health markets in the United States and internationally.Show more

Rewards

Trading at 49.8% below our estimate of its fair value

Earnings are forecast to grow 14.08% per year

Risks

Debt is not well covered by operating cash flow

Share Price

Market Cap

1Y Return

Further research onLeidos Holdings

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.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.

Leidos Holdings, Inc., together with its subsidiaries, provides services and solutions in the defense, intelligence, civil, and health markets in the United States and internationally.

Very undervalued second-rate dividend payer.