Returns On Capital Signal Difficult Times Ahead For EMS-CHEMIE HOLDING (VTX:EMSN)

When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This indicates the company is producing less profit from its investments and its total assets are decreasing. Having said that, after a brief look, EMS-CHEMIE HOLDING (VTX:EMSN) we aren't filled with optimism, but let's investigate further.

What Is Return On Capital Employed (ROCE)?

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. 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)

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

So, 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 13%.

Check out 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 for free.

What Does the ROCE Trend For EMS-CHEMIE HOLDING Tell Us?

In terms of EMS-CHEMIE HOLDING's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 35% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect EMS-CHEMIE HOLDING to turn into a multi-bagger.

What We Can Learn From EMS-CHEMIE HOLDING's ROCE

In summary, it's unfortunate that EMS-CHEMIE HOLDING is generating lower returns from the same amount of capital. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 45% return. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

While EMS-CHEMIE HOLDING doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation for EMSN on our platform.

EMS-CHEMIE HOLDING is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.