Can Lux Industries (NSE:LUXIND) Prolong Its Impressive Returns?

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. So, when we ran our eye over Lux Industries' (NSE:LUXIND) trend of ROCE, we really liked what we saw.

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. To calculate this metric for Lux Industries, this is the formula:

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

0.34 = ₹2.0b ÷ (₹9.1b - ₹3.1b) (Based on the trailing twelve months to September 2020).

Therefore, Lux Industries has an ROCE of 34%. That's a fantastic return and not only that, it outpaces the average of 8.3% earned by companies in a similar industry.

See our latest analysis for Lux Industries

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Lux Industries' past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Lux Industries Tell Us?

Lux Industries deserves to be commended in regards to it's returns. The company has consistently earned 34% for the last five years, and the capital employed within the business has risen 105% in that time. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. If Lux Industries can keep this up, we'd be very optimistic about its future.

One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 34% of total assets, is good to see from a business owner's perspective. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.

In Conclusion...

In summary, we're delighted to see that Lux Industries has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. And long term investors would be thrilled with the 133% return they've received over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

On a final note, we've found 1 warning sign for Lux Industries that we think you should be aware of.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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