Stock Analysis

Capital Investments At Lennox International (NYSE:LII) Point To A Promising Future

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NYSE:LII
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If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Ergo, when we looked at the ROCE trends at Lennox International (NYSE:LII), we liked what we saw.

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

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. The formula for this calculation on Lennox International is:

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

0.44 = US$587m ÷ (US$2.2b - US$827m) (Based on the trailing twelve months to December 2021).

Thus, Lennox International has an ROCE of 44%. 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 March 10th 2022

In the above chart we have measured Lennox International's 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 Lennox International.

What Does the ROCE Trend For Lennox International Tell Us?

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 44% and the business has deployed 54% 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. If these trends can continue, it wouldn't surprise us if the company became a multi-bagger.

One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 38% of total assets, is good to see from a business owner's perspective. Effectively suppliers now fund less of the business, which can lower some elements of risk.

In Conclusion...

In summary, we're delighted to see that Lennox International has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. And the stock has followed suit returning a meaningful 61% to shareholders over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

On a final note, we've found 3 warning signs for Lennox International that we think you should be aware of.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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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About NYSE:LII

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.

Established dividend payer with limited growth.