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

There are a few key trends to look for if we want to identify the next multi-bagger. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So while EMS-CHEMIE HOLDING (VTX:EMSN) has a high ROCE right now, lets see what we can decipher from how returns are changing.

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. Analysts use this formula to calculate it for EMS-CHEMIE HOLDING:

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

0.31 = CHF611m ÷ (CHF2.3b - CHF374m) (Based on the trailing twelve months to December 2022).

Therefore, EMS-CHEMIE HOLDING has an ROCE of 31%. In absolute terms that's a great return and it's even better than the Chemicals industry average of 12%.

View 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'd like, you can check out the forecasts from the analysts covering EMS-CHEMIE HOLDING here for free.

How Are Returns Trending?

Over the past five years, EMS-CHEMIE HOLDING's ROCE and capital employed have both remained mostly flat. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So while the current operations are delivering respectable returns, unless capital employed increases we'd be hard-pressed to believe it's a multi-bagger going forward. On top of that you'll notice that EMS-CHEMIE HOLDING has been paying out a large portion (88%) of earnings in the form of dividends to shareholders. Most shareholders probably know this and own the stock for its dividend.

The Bottom Line

While EMS-CHEMIE HOLDING has impressive profitability from its capital, it isn't increasing that amount of capital. And investors may be recognizing these trends since the stock has only returned a total of 21% to shareholders over the last five years. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

Like most companies, EMS-CHEMIE HOLDING does come with some risks, and we've found 1 warning sign that you should be aware of.

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.