CADScott said
I know that this does work for PS1 games running through Retroarch, I tried it and LaunchBox extracted the bin/cue file properly and ran it in Retroarch. It looks as though you have not checked the extract rom from archive checkbox in the Retroarch emulator settings inside LaunchBox.
The issue with using LaunchBox to extract Retroarch games is that the setting will be common for all platforms, so if you use Retroarch for any other systems, they will all extract first.
This would not be an issue, but Retroarch also defaults to writing save files to the rom directory, which in this case is not the place where your zipped rom is, but instead is in the 7Zip/temp directory in LaunchBox. This means that all the saves are in a single place for all systems, which could create problems if there are common names across systems, and makes it very easy to lose them as they are stored in a temp directory. It also means that old saves you have before the roms were compressed will not show up in game.
I experimented with zipping my PSX roms, and went back to uncompressed due to the save issues.
That option comes by default? right? So im pretty sure i left as it was, anyway, as you said, i think is better do with .cue/.iso