Stock Analysis

Investors Will Want Lynas Rare Earths' (ASX:LYC) Growth In ROCE To Persist

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ASX:LYC
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If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at Lynas Rare Earths (ASX:LYC) 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. To calculate this metric for Lynas Rare Earths, this is the formula:

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

0.18 = AU$274m ÷ (AU$1.6b - AU$121m) (Based on the trailing twelve months to December 2021).

Therefore, Lynas Rare Earths has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 8.8% generated by the Metals and Mining industry.

Check out our latest analysis for Lynas Rare Earths

roce
ASX:LYC Return on Capital Employed May 27th 2022

In the above chart we have measured Lynas Rare Earths' 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 Lynas Rare Earths here for free.

How Are Returns Trending?

The fact that Lynas Rare Earths is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses five years ago, but now it's earning 18% which is a sight for sore eyes. In addition to that, Lynas Rare Earths is employing 138% more capital than previously which is expected of a company that's trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

The Key Takeaway

Overall, Lynas Rare Earths gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. Since the stock has returned a staggering 1,060% to shareholders over the last five years, it looks like investors are recognizing these changes. 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.

If you want to continue researching Lynas Rare Earths, you might be interested to know about the 1 warning sign that our analysis has discovered.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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