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

If you're looking for a multi-bagger, there's a few things to keep an eye out 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at EMS-CHEMIE HOLDING (VTX:EMSN), they do have a high ROCE, but we weren't exactly elated from how returns are trending.

Return On Capital Employed (ROCE): What Is It?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on EMS-CHEMIE HOLDING is:

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

0.26 = CHF567m ÷ (CHF2.5b - CHF308m) (Based on the trailing twelve months to June 2023).

Therefore, EMS-CHEMIE HOLDING has an ROCE of 26%. That's a fantastic return and not only that, it outpaces the average of 12% 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'd like, you can check out the forecasts from the analysts covering EMS-CHEMIE HOLDING here for free.

What Can We Tell From EMS-CHEMIE HOLDING's ROCE Trend?

Things have been pretty stable at EMS-CHEMIE HOLDING, with its capital employed and returns on that capital staying somewhat the same for the last 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. On top of that you'll notice that EMS-CHEMIE HOLDING has been paying out a large portion (95%) of earnings in the form of dividends to shareholders. Most shareholders probably know this and own the stock for its dividend.

Our Take On EMS-CHEMIE HOLDING's ROCE

While EMS-CHEMIE HOLDING has impressive profitability from its capital, it isn't increasing that amount of capital. And with the stock having returned a mere 29% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

One more thing to note, we've identified 1 warning sign with EMS-CHEMIE HOLDING and understanding it should be part of your investment process.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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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.