Slowing Rates Of Return At EMS-CHEMIE HOLDING (VTX:EMSN) Leave Little Room For Excitement

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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 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.

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)

0.29 = CHF643m ÷ (CHF2.6b - CHF405m) (Based on the trailing twelve months to June 2022).

Therefore, EMS-CHEMIE HOLDING has an ROCE of 29%. 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

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 report for EMS-CHEMIE HOLDING.

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

Over the past five years, EMS-CHEMIE HOLDING's ROCE and capital employed have both remained mostly flat. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. 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. That being the case, it makes sense that EMS-CHEMIE HOLDING has been paying out 89% of its earnings to its shareholders. Most shareholders probably know this and own the stock for its dividend.

The Key Takeaway

In summary, EMS-CHEMIE HOLDING isn't compounding its earnings but is generating decent returns on the same amount of capital employed. Unsurprisingly, the stock has only gained 11% over the last five years, which potentially indicates that investors are accounting for this going forward. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

EMS-CHEMIE HOLDING does have some risks though, and we've spotted 1 warning sign for EMS-CHEMIE HOLDING that you might be interested in.

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.