Returns On Capital Are Showing Encouraging Signs At LSB Industries (NYSE:LXU)

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. Speaking of which, we noticed some great changes in LSB Industries' (NYSE:LXU) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What Is It?

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. To calculate this metric for LSB Industries, this is the formula:

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

0.13 = US$152m ÷ (US$1.3b - US$96m) (Based on the trailing twelve months to June 2023).

Therefore, LSB Industries has an ROCE of 13%. That's a relatively normal return on capital, and it's around the 11% generated by the Chemicals industry.

View our latest analysis for LSB Industries

Above you can see how the current ROCE for LSB Industries compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering LSB Industries here for free.

What Can We Tell From LSB Industries' ROCE Trend?

LSB Industries has broken into the black (profitability) and we're sure it's a sight for sore eyes. While the business was unprofitable in the past, it's now turned things around and is earning 13% on its capital. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. Because in the end, a business can only get so efficient.

Our Take On LSB Industries' ROCE

To bring it all together, LSB Industries has done well to increase the returns it's generating from its capital employed. Since the stock has returned a solid 57% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for LSB Industries (of which 1 is a bit concerning!) that you should know about.

While LSB Industries 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.