Returns On Capital Signal Tricky Times Ahead For Croda International (LON:CRDA)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at Croda International (LON:CRDA) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Croda International is:

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

0.065 = UK£210m ÷ (UK£3.6b - UK£338m) (Based on the trailing twelve months to June 2024).

Therefore, Croda International has an ROCE of 6.5%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 9.7%.

Check out our latest analysis for Croda International

In the above chart we have measured Croda International's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Croda International .

So How Is Croda International's ROCE Trending?

On the surface, the trend of ROCE at Croda International doesn't inspire confidence. Around five years ago the returns on capital were 21%, but since then they've fallen to 6.5%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

Our Take On Croda International's ROCE

In summary, we're somewhat concerned by Croda International's diminishing returns on increasing amounts of capital. And, the stock has remained flat over the last five years, so investors don't seem too impressed either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Croda International does have some risks though, and we've spotted 1 warning sign for Croda International 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.