The Returns At L'Air Liquide (EPA:AI) Aren't Growing

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think L'Air Liquide (EPA:AI) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is 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. Analysts use this formula to calculate it for L'Air Liquide:

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

0.10 = €4.2b ÷ (€50b - €9.5b) (Based on the trailing twelve months to June 2022).

Therefore, L'Air Liquide has an ROCE of 10%. On its own, that's a standard return, however it's much better than the 8.4% generated by the Chemicals industry.

Check out our latest analysis for L'Air Liquide

Above you can see how the current ROCE for L'Air Liquide 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 L'Air Liquide here for free.

How Are Returns Trending?

There hasn't been much to report for L'Air Liquide's returns and its level of capital employed because both metrics have been steady for the past five years. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. With that in mind, unless investment picks up again in the future, we wouldn't expect L'Air Liquide to be a multi-bagger going forward. This probably explains why L'Air Liquide is paying out 48% of its income to shareholders in the form of dividends. Unless businesses have highly compelling growth opportunities, they'll typically return some money to shareholders.

Our Take On L'Air Liquide's ROCE

In summary, L'Air Liquide isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Although the market must be expecting these trends to improve because the stock has gained 71% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

L'Air Liquide does have some risks though, and we've spotted 1 warning sign for L'Air Liquide that you might be interested in.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.