The content of this article will benefit those of you who are starting to educate yourself about investing in the stock market and want a simplistic look at the return on LyondellBasell Industries NV (NYSE:LYB) stock.
Buying LyondellBasell Industries makes you a partial owner of the company. This share represents a portion of capital used by the company to operate the business, and it is important the company is able to use the capital base efficiently to create adequate cash flows for you as an investor. You need to pay attention to this because your return on investment is linked to dividends and internal investments to improve the business, which can only occur if the company is expected to produce adequate earnings with the capital that has been provided. To understand LyondellBasell Industries’s capital returns we will look at a useful metric called return on capital employed. This will tell us if the company is growing your capital and placing you in good stead to sell your shares at a profit.
What is Return on Capital Employed (ROCE)?
Choosing to invest in LyondellBasell Industries comes at the cost of investing in another potentially favourable company. The cost of missing out on another opportunity comes in the form of the potential long term gain you could’ve received, which is dependent on the gap between the return on capital you could’ve achieved and that of the company you invested in. Hence, capital returns are very important, and should be examined before you invest in conjunction with a certain benchmark that represents the minimum return you require to be compensated for the risk of missing out on other potentially lucrative investments. To determine LyondellBasell Industries’s capital return we will use ROCE, which tells us how much the company makes from the capital employed in their operations (for things like machinery, wages etc). Take a look at the formula box beneath:
ROCE Calculation for LYB
Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)
Capital Employed = (Total Assets – Current Liabilities)
∴ ROCE = US$5.9b ÷ (US$29b – US$6.2b) = 26%
As you can see, LYB earned $25.9 from every $100 you invested over the previous twelve months. Comparing this to a healthy 15% benchmark shows LyondellBasell Industries is currently able to return a fantastic amount to owners for the use of their capital, which is a good sign for those who believe this will continue and the company’s management will find good uses for the earnings they create.
A deeper look
The encouraging ROCE is good news for LyondellBasell Industries investors if the company is able to maintain strong earnings and control their capital needs. But if this doesn’t occur, LYB’s ROCE may deteriorate, in which case your money is better invested elsewhere. So it is important for investors to understand what is going on under the hood and look at how these variables have been behaving. Looking at the past 3 year period shows us that LYB weakened investor return on capital employed from 33%. With this, the current earnings of US$5.9b improved from US$5.7b however capital employed has grown by a proportionally greater amount due to a hike in the level of total assets , which means that although earnings have increased, LYB requires more capital to produce each $1 of earnings.
Although LyondellBasell Industries’s ROCE has decreased over the past few years, the company still remains an attractive candidate that is capable of producing solid capital returns and a potentially strong return on investment. It is important to know that ROCE does not dictate returns alone, so you need to consider other fundamentals in the business such as future prospects and valuation. If you don’t pay attention to these factors you cannot be sure if the downward path is a signal to run, or just a blip in an otherwise solid return profile. LyondellBasell Industries’s fundamentals can be explored with the links I’ve provided below if you are interested, otherwise you can start looking at other high-performing stocks.
- Future Outlook: What are well-informed industry analysts predicting for LYB’s future growth? Take a look at our free research report of analyst consensus for LYB’s outlook.
- Valuation: What is LYB worth today? Is the stock undervalued, even if its ROCE is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether LYB is currently mispriced by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.