Olin's (NYSE:OLN) Returns On Capital Are Heading Higher
Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Olin (NYSE:OLN) and its trend of ROCE, we really liked what we saw.
Return On Capital Employed (ROCE): What Is It?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Olin:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.13 = US$792m ÷ (US$7.7b - US$1.5b) (Based on the trailing twelve months to December 2023).
Thus, Olin has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 9.9% generated by the Chemicals industry.
Check out our latest analysis for Olin
In the above chart we have measured Olin's 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 Olin for free.
What Does the ROCE Trend For Olin Tell Us?
We're pretty happy with how the ROCE has been trending at Olin. The figures show that over the last five years, returns on capital have grown by 67%. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. Speaking of capital employed, the company is actually utilizing 22% less than it was five years ago, which can be indicative of a business that's improving its efficiency. Olin may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.
The Bottom Line On Olin's ROCE
In a nutshell, we're pleased to see that Olin has been able to generate higher returns from less capital. Since the stock has returned a staggering 205% to shareholders over the last five years, it looks like investors are recognizing these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.
One more thing to note, we've identified 3 warning signs with Olin and understanding these should be part of your investment process.
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.
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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.
