Investors Met With Slowing Returns on Capital At EMS-CHEMIE HOLDING (VTX:EMSN)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So while EMS-CHEMIE HOLDING (VTX:EMSN) has a high ROCE right now, lets see what we can decipher from how returns are changing.

Understanding 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 EMS-CHEMIE HOLDING, this is the formula:

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

0.29 = CHF516m ÷ (CHF2.1b - CHF291m) (Based on the trailing twelve months to December 2020).

Therefore, EMS-CHEMIE HOLDING has an ROCE of 29%. That's a fantastic return and not only that, it outpaces the average of 13% earned by companies in a similar industry.

See our latest analysis for EMS-CHEMIE HOLDING

In the above chart we have measured EMS-CHEMIE HOLDING'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.

So How Is EMS-CHEMIE HOLDING's ROCE Trending?

There hasn't been much to report for EMS-CHEMIE HOLDING's returns and its level of capital employed because both metrics have been steady for the past five years. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. Although current returns are high, we'd need more evidence of underlying growth for it to look like a multi-bagger going forward. That being the case, it makes sense that EMS-CHEMIE HOLDING has been paying out 85% of its earnings to its shareholders. These mature businesses typically have reliable earnings and not many places to reinvest them, so the next best option is to put the earnings into shareholders pockets.

The Bottom Line On EMS-CHEMIE HOLDING's ROCE

While EMS-CHEMIE HOLDING has impressive profitability from its capital, it isn't increasing that amount of capital. Yet to long term shareholders the stock has gifted them an incredible 103% return in the last five years, so the market appears to be rosy about its future. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

If you're still interested in EMS-CHEMIE HOLDING it's worth checking out our FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.

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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