What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Ergo, when we looked at the ROCE trends at Louisiana-Pacific (NYSE:LPX), we liked what we saw.
Return On Capital Employed (ROCE): What Is It?
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. To calculate this metric for Louisiana-Pacific, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.21 = US$458m ÷ (US$2.5b - US$254m) (Based on the trailing twelve months to March 2024).
So, Louisiana-Pacific has an ROCE of 21%. That's a fantastic return and not only that, it outpaces the average of 13% earned by companies in a similar industry.
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 to see what analysts are forecasting going forward, you should check out our free analyst report for Louisiana-Pacific .
What Does the ROCE Trend For Louisiana-Pacific Tell Us?
It's hard not to be impressed by Louisiana-Pacific's returns on capital. The company has consistently earned 21% for the last five years, and the capital employed within the business has risen 20% in that time. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. If Louisiana-Pacific can keep this up, we'd be very optimistic about its future.
The Bottom Line On Louisiana-Pacific's ROCE
In the end, the company has proven it can reinvest it's capital at high rates of returns, which you'll remember is a trait of a multi-bagger. And the stock has done incredibly well with a 236% return over the last five years, so long term investors are no doubt ecstatic with that result. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.
If you want to continue researching Louisiana-Pacific, you might be interested to know about the 2 warning signs that our analysis has discovered.
High returns are a key ingredient to strong performance, so check out our free list ofstocks 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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