Investors Could Be Concerned With EMS-CHEMIE HOLDING's (VTX:EMSN) Returns On Capital

When researching a stock for investment, what can tell us that the company is in decline? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. On that note, looking into EMS-CHEMIE HOLDING (VTX:EMSN), we weren't too upbeat about how things were going.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for EMS-CHEMIE HOLDING, this is the formula:

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

0.26 = CHF493m ÷ (CHF2.2b - CHF293m) (Based on the trailing twelve months to December 2023).

Thus, EMS-CHEMIE HOLDING has an ROCE of 26%. In absolute terms that's a great return and it's even better than the Chemicals industry average of 14%.

Check out our latest analysis for EMS-CHEMIE HOLDING

Above you can see how the current ROCE for EMS-CHEMIE HOLDING 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 EMS-CHEMIE HOLDING .

What The Trend Of ROCE Can Tell Us

There is reason to be cautious about EMS-CHEMIE HOLDING, given the returns are trending downwards. About five years ago, returns on capital were 35%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on EMS-CHEMIE HOLDING becoming one if things continue as they have.

The Bottom Line On EMS-CHEMIE HOLDING's ROCE

In summary, it's unfortunate that EMS-CHEMIE HOLDING is generating lower returns from the same amount of capital. In spite of that, the stock has delivered a 38% return to shareholders who held over the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

EMS-CHEMIE HOLDING could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for EMSN on our platform quite valuable.

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.