L'Air Liquide's (EPA:AI) Returns On Capital Are Heading Higher

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. 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 L'Air Liquide (EPA:AI) so let's look a bit deeper.

Return On Capital Employed (ROCE): What is it?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for L'Air Liquide:

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

0.10 = €3.9b ÷ (€47b - €8.4b) (Based on the trailing twelve months to December 2021).

Therefore, L'Air Liquide has an ROCE of 10%. On its own, that's a standard return, however it's much better than the 8.4% generated by the Chemicals industry.

See our latest analysis for L'Air Liquide

In the above chart we have measured L'Air Liquide'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 L'Air Liquide here for free.

How Are Returns Trending?

L'Air Liquide's ROCE growth is quite impressive. The figures show that over the last five years, ROCE has grown 36% whilst employing roughly the same amount of capital. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

The Key Takeaway

As discussed above, L'Air Liquide appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 77% return over the last five years. In light of that, we think it's worth looking further into this stock because if L'Air Liquide can keep these trends up, it could have a bright future ahead.

One more thing, we've spotted 1 warning sign facing L'Air Liquide that you might find interesting.

While L'Air Liquide isn't earning the highest return, check out this free list of companies that are 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.