Yahoo Finance Capital Allocation Trends At LyondellBasell Industries (NYSE:LYB) Aren't Ideal
If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at LyondellBasell Industries (NYSE:LYB), it didn't seem to tick all of these boxes.
Understanding 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 LyondellBasell Industries:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.11 = US$3.3b ÷ (US$37b - US$6.1b) (Based on the trailing twelve months to March 2024).
Therefore, LyondellBasell Industries has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Chemicals industry average of 8.8% it's much better.
Check out 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, you can check out the forecasts from the analysts covering LyondellBasell Industries for free.
So How Is LyondellBasell Industries' ROCE Trending?
When we looked at the ROCE trend at LyondellBasell Industries, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 11% from 21% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.
Our Take On LyondellBasell Industries' ROCE
We're a bit apprehensive about LyondellBasell Industries because despite more capital being deployed in the business, returns on that capital and sales have both fallen. However the stock has delivered a 49% return to shareholders over the last five years, so investors might be expecting the trends to turn around. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.
On a final note, we've found 2 warning signs for LyondellBasell Industries that we think you should be aware of.
While LyondellBasell Industries isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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.
