Olin (NYSE:OLN) Is Achieving High Returns On Its Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. So when we looked at the ROCE trend of Olin (NYSE:OLN) we really liked what we saw.

What Is 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. Analysts use this formula to calculate it for Olin:

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

0.31 = US$2.1b ÷ (US$8.2b - US$1.6b) (Based on the trailing twelve months to September 2022).

So, Olin has an ROCE of 31%. In absolute terms that's a great return and it's even better than the Chemicals industry average of 12%.

View our latest analysis for Olin

In the above chart we have measured Olin'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 Olin here for free.

What Can We Tell From Olin's ROCE Trend?

Olin has not disappointed in regards to ROCE growth. We found that the returns on capital employed over the last five years have risen by 681%. The company is now earning US$0.3 per dollar of capital employed. Speaking of capital employed, the company is actually utilizing 21% less than it was five years ago, which can be indicative of a business that's improving its efficiency. Olin may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.

Our Take On Olin's ROCE

In the end, Olin has proven it's capital allocation skills are good with those higher returns from less amount of capital. Since the stock has returned a solid 79% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Olin does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those doesn't sit too well with us...

Olin is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.