Returns On Capital Signal Tricky Times Ahead For Lenzing (VIE:LNZ)

Simply Wall St · 04/14 04:02

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Having said that, from a first glance at Lenzing (VIE:LNZ) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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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. To calculate this metric for Lenzing, this is the formula:

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

0.013 = €50m ÷ (€5.0b - €1.1b) (Based on the trailing twelve months to December 2024).

Thus, Lenzing has an ROCE of 1.3%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 9.9%.

View our latest analysis for Lenzing

roce
WBAG:LNZ Return on Capital Employed April 14th 2025

Above you can see how the current ROCE for Lenzing 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 Lenzing for free.

The Trend Of ROCE

When we looked at the ROCE trend at Lenzing, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 1.3% from 6.1% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

In Conclusion...

Bringing it all together, while we're somewhat encouraged by Lenzing's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 42% over the last five years, investors may not be too optimistic on this trend improving either. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

On a final note, we've found 2 warning signs for Lenzing that we think you should be aware of.

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