Louisiana-Pacific (NYSE:LPX) Is Finding It Tricky To Allocate Its Capital

Simply Wall St ·  Dec 14, 2023 07:34

What financial metrics can indicate to us that a company is maturing or even in decline? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. In light of that, from a first glance at Louisiana-Pacific (NYSE:LPX), we've spotted some signs that it could be struggling, so let's investigate.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Louisiana-Pacific is:

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

0.14 = US$299m ÷ (US$2.4b - US$266m) (Based on the trailing twelve months to September 2023).

Thus, Louisiana-Pacific has an ROCE of 14%. In absolute terms, that's a pretty standard return but compared to the Forestry industry average it falls behind.

Check out our latest analysis for Louisiana-Pacific

NYSE:LPX Return on Capital Employed December 14th 2023

Above you can see how the current ROCE for Louisiana-Pacific 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 Louisiana-Pacific here for free.

The Trend Of ROCE

We are a bit worried about the trend of returns on capital at Louisiana-Pacific. To be more specific, the ROCE was 28% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect Louisiana-Pacific to turn into a multi-bagger.

The Bottom Line On Louisiana-Pacific's ROCE

In summary, it's unfortunate that Louisiana-Pacific is generating lower returns from the same amount of capital. Since the stock has skyrocketed 239% over the last five years, it looks like investors have high expectations of the stock. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

One final note, you should learn about the 2 warning signs we've spotted with Louisiana-Pacific (including 1 which doesn't sit too well with us) .

While Louisiana-Pacific isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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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