Koninklijke DSM (AMS:DSM) Is Reinvesting At Lower Rates Of Return

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Koninklijke DSM (AMS:DSM) 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)?

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. To calculate this metric for Koninklijke DSM, this is the formula:

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

0.044 = €652m ÷ (€17b - €2.6b) (Based on the trailing twelve months to December 2022).

Therefore, Koninklijke DSM has an ROCE of 4.4%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 14%.

See our latest analysis for Koninklijke DSM

Above you can see how the current ROCE for Koninklijke DSM 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 report for Koninklijke DSM.

What Does the ROCE Trend For Koninklijke DSM Tell Us?

On the surface, the trend of ROCE at Koninklijke DSM doesn't inspire confidence. Around five years ago the returns on capital were 7.5%, but since then they've fallen to 4.4%. 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. If these investments prove successful, this can bode very well for long term stock performance.

Our Take On Koninklijke DSM's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Koninklijke DSM is reinvesting for growth and has higher sales as a result. Furthermore the stock has climbed 50% over the last five years, it would appear that investors are upbeat about the future. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

Koninklijke DSM does have some risks, we noticed 2 warning signs (and 1 which can't be ignored) we think you should know about.

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.