Here's What's Concerning About Laxmi Organic Industries' (NSE:LXCHEM) Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Laxmi Organic Industries (NSE:LXCHEM) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding 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. The formula for this calculation on Laxmi Organic Industries is:

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

0.12 = ₹1.8b ÷ (₹24b - ₹8.3b) (Based on the trailing twelve months to March 2023).

Therefore, Laxmi Organic Industries has an ROCE of 12%. In isolation, that's a pretty standard return but against the Chemicals industry average of 17%, it's not as good.

View our latest analysis for Laxmi Organic Industries

In the above chart we have measured Laxmi Organic Industries' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Laxmi Organic Industries.

SWOT Analysis for Laxmi Organic Industries

The Trend Of ROCE

When we looked at the ROCE trend at Laxmi Organic Industries, we didn't gain much confidence. To be more specific, ROCE has fallen from 27% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a related note, Laxmi Organic Industries has decreased its current liabilities to 34% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

Our Take On Laxmi Organic Industries' ROCE

To conclude, we've found that Laxmi Organic Industries is reinvesting in the business, but returns have been falling. And in the last year, the stock has given away 29% so the market doesn't look too hopeful on these trends strengthening any time soon. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

Laxmi Organic Industries does have some risks, we noticed 2 warning signs (and 1 which is potentially serious) we think you should know about.

While Laxmi Organic Industries 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.