BASF (ETR:BAS) Has Some Difficulty Using Its Capital Effectively

When researching a stock for investment, what can tell us that the company is in decline? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. In light of that, from a first glance at BASF (ETR:BAS), we've spotted some signs that it could be struggling, so let's investigate.

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 BASF:

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

0.035 = €2.2b ÷ (€82b - €20b) (Based on the trailing twelve months to June 2024).

Thus, BASF has an ROCE of 3.5%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 8.4%.

Check out our latest analysis for BASF

Above you can see how the current ROCE for BASF 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 analyst report for BASF .

So How Is BASF's ROCE Trending?

In terms of BASF's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 5.3%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect BASF to turn into a multi-bagger.

What We Can Learn From BASF's ROCE

In summary, it's unfortunate that BASF is generating lower returns from the same amount of capital. Investors must expect better things on the horizon though because the stock has risen 5.2% in the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

BASF does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those doesn't sit too well with us...

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.