Givaudan (VTX:GIVN) May Have Issues Allocating Its Capital

By
Simply Wall St
Published
January 11, 2022
SWX:GIVN
Source: Shutterstock

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. However, after investigating Givaudan (VTX:GIVN), we don't think it's current trends fit the mold of a multi-bagger.

Understanding 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 Givaudan:

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

0.12 = CHF1.1b ÷ (CHF11b - CHF2.4b) (Based on the trailing twelve months to June 2021).

Thus, Givaudan has an ROCE of 12%. That's a relatively normal return on capital, and it's around the 14% generated by the Chemicals industry.

Check out our latest analysis for Givaudan

roce
SWX:GIVN Return on Capital Employed January 11th 2022

Above you can see how the current ROCE for Givaudan compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Givaudan here for free.

What Can We Tell From Givaudan's ROCE Trend?

When we looked at the ROCE trend at Givaudan, we didn't gain much confidence. To be more specific, ROCE has fallen from 16% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

In Conclusion...

In summary, Givaudan is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 172% gain to shareholders who have held over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

If you want to continue researching Givaudan, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Givaudan isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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