To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we’ll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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. And in light of that, the trends we’re seeing at Olin’s (NYSE:OLN) look very promising so lets take a look.
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. The formula for this calculation on Olin is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.28 = US$1.8b ÷ (US$8.0b – US$1.6b) (Based on the trailing twelve months to December 2022).
So, Olin has an ROCE of 28%. In absolute terms that’s a great return and it’s even better than the Chemicals industry average of 11%.
View our latest analysis for Olin
Above you can see how the current ROCE for Olin 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 Olin.
The Trend Of ROCE
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 441%. That’s a very favorable trend because this means that the company is earning more per dollar of capital that’s being employed. Speaking of capital employed, the company is actually utilizing 22% 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.
The Key Takeaway
In summary, it’s great to see that Olin has been able to turn things around and earn higher returns on lower amounts of capital. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. So given the stock has proven it has promising trends, it’s worth researching the company further to see if these trends are likely to persist.
Olin does have some risks, we noticed 3 warning signs (and 1 which is a bit concerning) we think you should know about.
If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning 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.
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