Many Would Be Envious Of Laxmi Organic Industries' (NSE:LXCHEM) Excellent Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So, when we ran our eye over Laxmi Organic Industries' (NSE:LXCHEM) trend of ROCE, we really liked what we saw.

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

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Laxmi Organic Industries:

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

0.24 = ₹3.2b ÷ (₹23b - ₹9.3b) (Based on the trailing twelve months to March 2022).

Thus, Laxmi Organic Industries has an ROCE of 24%. In absolute terms that's a great return and it's even better than the Chemicals industry average of 17%.

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're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Does the ROCE Trend For Laxmi Organic Industries Tell Us?

Laxmi Organic Industries deserves to be commended in regards to it's returns. The company has consistently earned 24% for the last four years, and the capital employed within the business has risen 188% 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 Laxmi Organic Industries can keep this up, we'd be very optimistic about its future.

Another thing to note, Laxmi Organic Industries has a high ratio of current liabilities to total assets of 41%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

What We Can Learn From Laxmi Organic Industries' ROCE

In short, we'd argue Laxmi Organic Industries has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. Therefore it's no surprise that shareholders have earned a respectable 39% return if they held over the last year. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

On a final note, we found 2 warning signs for Laxmi Organic Industries (1 is potentially serious) 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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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.