Laxmi Organic Industries (NSE:LXCHEM) Will Be Hoping To Turn Its Returns On Capital Around

What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Laxmi Organic Industries (NSE:LXCHEM) and its ROCE trend, we weren't exactly thrilled.

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What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Laxmi Organic Industries, this is the formula:

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

0.10 = ₹2.0b ÷ (₹28b - ₹8.6b) (Based on the trailing twelve months to December 2024).

So, Laxmi Organic Industries has an ROCE of 10%. That's a relatively normal return on capital, and it's around the 13% generated by the Chemicals industry.

View our latest analysis for Laxmi Organic Industries

Above you can see how the current ROCE for Laxmi Organic Industries 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 analyst report 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 15% over the last five years. However it looks like Laxmi Organic Industries might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, Laxmi Organic Industries has done well to pay down its current liabilities to 30% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. 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.

The Bottom Line On Laxmi Organic Industries' ROCE

To conclude, we've found that Laxmi Organic Industries is reinvesting in the business, but returns have been falling. Since the stock has declined 62% over the last three years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Laxmi Organic Industries has the makings of a multi-bagger.

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

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.