Chr. Hansen Holding (CPH:CHR) Could Be Struggling To Allocate Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. Although, when we looked at Chr. Hansen Holding (CPH:CHR), it didn't seem to tick all of these boxes.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Chr. Hansen Holding:

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

0.12 = €315m ÷ (€3.1b - €460m) (Based on the trailing twelve months to May 2021).

Thus, Chr. Hansen Holding has an ROCE of 12%. That's a relatively normal return on capital, and it's around the 11% generated by the Chemicals industry.

See our latest analysis for Chr. Hansen Holding

In the above chart we have measured Chr. Hansen Holding's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Chr. Hansen Holding.

What Does the ROCE Trend For Chr. Hansen Holding Tell Us?

When we looked at the ROCE trend at Chr. Hansen Holding, we didn't gain much confidence. Around five years ago the returns on capital were 19%, but since then they've fallen to 12%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

Our Take On Chr. Hansen Holding's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Chr. Hansen Holding is reinvesting for growth and has higher sales as a result. And the stock has followed suit returning a meaningful 55% to shareholders over the last five years. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

If you'd like to know more about Chr. Hansen Holding, we've spotted 2 warning signs, and 1 of them doesn't sit too well with us.

While Chr. Hansen Holding may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list 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.
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