Yahoo Finance LyondellBasell Industries (NYSE:LYB) Could Be Struggling To Allocate Capital
Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating LyondellBasell Industries (NYSE:LYB), we don't think it's current trends fit the mold of a multi-bagger.
Return On Capital Employed (ROCE): What Is It?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for LyondellBasell Industries:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.17 = US$5.1b ÷ (US$36b - US$6.8b) (Based on the trailing twelve months to December 2022).
Therefore, LyondellBasell Industries has an ROCE of 17%. In absolute terms, that's a satisfactory return, but compared to the Chemicals industry average of 11% it's much better.
View our latest analysis for LyondellBasell Industries
Above you can see how the current ROCE for LyondellBasell Industries 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 LyondellBasell Industries.
How Are Returns Trending?
In terms of LyondellBasell Industries' historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 26% over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.
In Conclusion...
To conclude, we've found that LyondellBasell Industries is reinvesting in the business, but returns have been falling. And investors may be recognizing these trends since the stock has only returned a total of 24% to shareholders over the last five years. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.
One more thing to note, we've identified 4 warning signs with LyondellBasell Industries and understanding them should be part of your investment process.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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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.
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