LSB Industries (NYSE:LXU) Is Investing Its Capital With Increasing Efficiency
There are a few key trends to look for if we want to identify the next multi-bagger. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. 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 looked at the ROCE trend of LSB Industries (NYSE:LXU) we really liked what we saw.
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. To calculate this metric for LSB Industries, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.23 = US$295m ÷ (US$1.5b - US$148m) (Based on the trailing twelve months to September 2022).
So, LSB Industries has an ROCE of 23%. In absolute terms that's a great return and it's even better than the Chemicals industry average of 12%.
Check out our latest analysis for LSB Industries
Above you can see how the current ROCE for LSB 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 LSB Industries here for free.
So How Is LSB Industries' ROCE Trending?
Shareholders will be relieved that LSB Industries has broken into profitability. The company now earns 23% on its capital, because five years ago it was incurring losses. While returns have increased, the amount of capital employed by LSB Industries has remained flat over the period. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.
The Bottom Line
To bring it all together, LSB Industries has done well to increase the returns it's generating from its capital employed. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. 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.
LSB Industries does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is a bit concerning...
High returns are a key ingredient to strong performance, so check out our free list ofstocks 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.
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