If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we’ll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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. However, after briefly looking over the numbers, we don’t think Quaker Chemical (NYSE:KWR) has the makings of a multi-bagger going forward, but let’s have a look at why that may be.
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 Quaker Chemical, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.036 = US$93m ÷ (US$2.9b – US$283m) (Based on the trailing twelve months to June 2020).
Therefore, Quaker Chemical has an ROCE of 3.6%. In absolute terms, that’s a low return and it also under-performs the Chemicals industry average of 9.3%.
In the above chart we have measured Quaker Chemical’s prior ROCE against its prior performance, but the future is arguably more important. If you’re interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
The Trend Of ROCE
On the surface, the trend of ROCE at Quaker Chemical doesn’t inspire confidence. Around five years ago the returns on capital were 15%, but since then they’ve fallen to 3.6%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.
Our Take On Quaker Chemical’s ROCE
In summary, despite lower returns in the short term, we’re encouraged to see that Quaker Chemical is reinvesting for growth and has higher sales as a result. And the stock has done incredibly well with a 164% return over the last five years, so long term investors are no doubt ecstatic with that result. So should these growth trends continue, we’d be optimistic on the stock going forward.
On a final note, we found 2 warning signs for Quaker Chemical (1 is a bit concerning) you should be aware of.
While Quaker Chemical may not currently earn the highest returns, we’ve compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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This article by Simply Wall St is general in nature. 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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