Why We Like The Returns At Lynas Rare Earths (ASX:LYC)

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. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, the ROCE of Lynas Rare Earths (ASX:LYC) looks great, so lets see what the trend can tell us.

Understanding Return On Capital Employed (ROCE)

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 Lynas Rare Earths, this is the formula:

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

0.27 = AU$525m ÷ (AU$2.1b - AU$124m) (Based on the trailing twelve months to June 2022).

Thus, Lynas Rare Earths has an ROCE of 27%. In absolute terms that's a great return and it's even better than the Metals and Mining industry average of 8.0%.

Check out our latest analysis for Lynas Rare Earths

Above you can see how the current ROCE for Lynas Rare Earths compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Lynas Rare Earths.

The Trend Of ROCE

We're delighted to see that Lynas Rare Earths is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses five years ago, but now it's earning 27% which is a sight for sore eyes. Not only that, but the company is utilizing 199% more capital than before, but that's to be expected from a company trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

Our Take On Lynas Rare Earths' ROCE

To the delight of most shareholders, Lynas Rare Earths has now broken into profitability. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if Lynas Rare Earths can keep these trends up, it could have a bright future ahead.

If you'd like to know about the risks facing Lynas Rare Earths, we've discovered 1 warning sign that you should be aware of.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning 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.