Linde (NYSE:LIN) May Have Issues Allocating Its Capital

By
Simply Wall St
Published
April 29, 2022
NYSE:LIN
Source: Shutterstock

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Having said that, from a first glance at Linde (NYSE:LIN) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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 Linde is:

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

0.081 = US$5.5b ÷ (US$82b - US$14b) (Based on the trailing twelve months to December 2021).

Therefore, Linde has an ROCE of 8.1%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 11%.

See our latest analysis for Linde

roce
NYSE:LIN Return on Capital Employed April 29th 2022

Above you can see how the current ROCE for Linde 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 report for Linde.

The Trend Of ROCE

When we looked at the ROCE trend at Linde, we didn't gain much confidence. To be more specific, ROCE has fallen from 14% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Bottom Line On Linde's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Linde. And long term investors must be optimistic going forward because the stock has returned a huge 174% to shareholders in the last five years. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

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

While Linde may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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