Here's What To Make Of Elementis' (LON:ELM) Decelerating Rates Of Return

There are a few key trends to look for if we want to identify the next 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Elementis (LON:ELM) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Elementis, this is the formula:

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

0.084 = US$105m ÷ (US$1.4b - US$177m) (Based on the trailing twelve months to June 2024).

Therefore, Elementis has an ROCE of 8.4%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 12%.

See our latest analysis for Elementis

Above you can see how the current ROCE for Elementis compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Elementis .

What The Trend Of ROCE Can Tell Us

We're a bit concerned with the trends, because the business is applying 29% less capital than it was five years ago and returns on that capital have stayed flat. This indicates to us that assets are being sold and thus the business is likely shrinking, which you'll remember isn't the typical ingredients for an up-and-coming multi-bagger. Not only that, but the low returns on this capital mentioned earlier would leave most investors unimpressed.

The Bottom Line

In summary, Elementis isn't reinvesting funds back into the business and returns aren't growing. And investors may be recognizing these trends since the stock has only returned a total of 14% to shareholders over the last five years. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

Elementis could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for ELM on our platform quite valuable.

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.