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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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at LSB Industries (NYSE:LXU) so let's look a bit deeper.
What Is 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. The formula for this calculation on LSB Industries is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0087 = US$9.2m ÷ (US$1.2b - US$124m) (Based on the trailing twelve months to September 2024).
Therefore, LSB Industries has an ROCE of 0.9%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 8.4%.
See 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 for free.
What Does the ROCE Trend For LSB Industries Tell Us?
LSB Industries has broken into the black (profitability) and we're sure it's a sight for sore eyes. The company now earns 0.9% on its capital, because five years ago it was incurring losses. Interestingly, the capital employed by the business has remained relatively flat, so these higher returns are either from prior investments paying off or increased efficiencies. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. Because in the end, a business can only get so efficient.
Our Take On LSB Industries' ROCE
To sum it up, LSB Industries is collecting higher returns from the same amount of capital, and that's impressive. 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.