Stock Analysis

A Look Into Lennox International's (NYSE:LII) Impressive Returns On Capital

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NYSE:LII
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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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, the ROCE of Lennox International (NYSE:LII) looks attractive right now, so lets see what the trend of returns can tell us.

Understanding Return On Capital Employed (ROCE)

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. The formula for this calculation on Lennox International is:

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

0.36 = US$603m ÷ (US$2.7b - US$968m) (Based on the trailing twelve months to June 2022).

Therefore, Lennox International has an ROCE of 36%. In absolute terms that's a great return and it's even better than the Building industry average of 14%.

See our latest analysis for Lennox International

roce
NYSE:LII Return on Capital Employed October 1st 2022

Above you can see how the current ROCE for Lennox International 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 Can We Tell From Lennox International's ROCE Trend?

It's hard not to be impressed by Lennox International's returns on capital. Over the past five years, ROCE has remained relatively flat at around 36% and the business has deployed 46% more capital into its operations. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. You'll see this when looking at well operated businesses or favorable business models.

The Key Takeaway

In the end, the company has proven it can reinvest it's capital at high rates of returns, which you'll remember is a trait of a multi-bagger. In light of this, the stock has only gained 29% over the last five years for shareholders who have owned the stock in this period. So because of the trends we're seeing, we'd recommend looking further into this stock to see if it has the makings of a multi-bagger.

If you'd like to know more about Lennox International, we've spotted 3 warning signs, and 1 of them is a bit unpleasant.

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.

What are the risks and opportunities for Lennox International?

Lennox International Inc., together with its subsidiaries, designs, manufactures, and markets a range of products for the heating, ventilation, air conditioning, and refrigeration markets in the United States, Canada, and internationally.

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Rewards

  • Earnings are forecast to grow 6.54% per year

  • Earnings have grown 9.7% per year over the past 5 years

Risks

  • Debt is not well covered by operating cash flow

  • High level of non-cash earnings

  • Significant insider selling over the past 3 months

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