Investors Could Be Concerned With Livent's (NYSE:LTHM) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Livent (NYSE:LTHM) and its ROCE trend, we weren't exactly thrilled.

Understanding 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 Livent, this is the formula:

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

0.077 = US$86m ÷ (US$1.2b - US$120m) (Based on the trailing twelve months to March 2022).

So, Livent has an ROCE of 7.7%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 12%.

View our latest analysis for Livent

In the above chart we have measured Livent's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Livent here for free.

What Does the ROCE Trend For Livent Tell Us?

When we looked at the ROCE trend at Livent, we didn't gain much confidence. Around five years ago the returns on capital were 17%, but since then they've fallen to 7.7%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

Our Take On Livent's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Livent is reinvesting for growth and has higher sales as a result. And the stock has done incredibly well with a 358% return over the last three years, so long term investors are no doubt ecstatic with that result. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

Livent does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those shouldn't be ignored...

While Livent 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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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.