Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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 Lindsay's (NYSE:LNN) returns on capital, so let's have a look.
Return On Capital Employed (ROCE): What Is It?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Lindsay:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.18 = US$107m ÷ (US$724m - US$133m) (Based on the trailing twelve months to May 2023).
Thus, Lindsay has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 12% generated by the Machinery industry.
Check out our latest analysis for Lindsay
In the above chart we have measured Lindsay'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 Lindsay here for free.
So How Is Lindsay's ROCE Trending?
Investors would be pleased with what's happening at Lindsay. Over the last five years, returns on capital employed have risen substantially to 18%. The amount of capital employed has increased too, by 40%. So we're very much inspired by what we're seeing at Lindsay thanks to its ability to profitably reinvest capital.
Our Take On Lindsay's ROCE
All in all, it's terrific to see that Lindsay is reaping the rewards from prior investments and is growing its capital base. Since the stock has only returned 34% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.
While Lindsay looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether LNN is currently trading for a fair price.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.