We Think Lux Industries (NSE:LUXIND) Might Have The DNA Of A Multi-Bagger

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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, the ROCE of Lux Industries (NSE:LUXIND) looks great, so lets see what the trend can tell us.

Understanding Return On Capital Employed (ROCE)

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)

0.35 = ₹3.6b ÷ (₹15b - ₹4.5b) (Based on the trailing twelve months to March 2021).

Therefore, Lux Industries has an ROCE of 35%. That's a fantastic return and not only that, it outpaces the average of 9.9% earned by companies in a similar industry.

View our latest analysis for Lux Industries

Historical performance is a great place to start when researching a stock so above you can see the gauge for Lux Industries' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Lux Industries, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

Investors would be pleased with what's happening at Lux Industries. The data shows that returns on capital have increased substantially over the last five years to 35%. The amount of capital employed has increased too, by 215%. So we're very much inspired by what we're seeing at Lux Industries thanks to its ability to profitably reinvest capital.

On a related note, the company's ratio of current liabilities to total assets has decreased to 30%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

The Bottom Line On Lux Industries' ROCE

To sum it up, Lux Industries has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

If you want to continue researching Lux Industries, you might be interested to know about the 2 warning signs that our analysis has discovered.

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. 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.
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