Returns on Capital Paint A Bright Future For Sociedad Química y Minera de Chile (NYSE:SQM)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at the ROCE trend of Sociedad Química y Minera de Chile (NYSE:SQM) we really liked what we saw.

Understanding 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 Sociedad Química y Minera de Chile:

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

0.27 = US$2.2b ÷ (US$11b - US$2.4b) (Based on the trailing twelve months to March 2024).

So, Sociedad Química y Minera de Chile has an ROCE of 27%. In absolute terms that's a great return and it's even better than the Electrical industry average of 13%.

View our latest analysis for Sociedad Química y Minera de Chile

In the above chart we have measured Sociedad Química y Minera de Chile'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 Sociedad Química y Minera de Chile .

How Are Returns Trending?

Investors would be pleased with what's happening at Sociedad Química y Minera de Chile. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 27%. Basically the business is earning more per dollar of capital invested and in addition to that, 119% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

The Bottom Line On Sociedad Química y Minera de Chile's ROCE

All in all, it's terrific to see that Sociedad Química y Minera de Chile is reaping the rewards from prior investments and is growing its capital base. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 68% return over the last five years. Therefore, we think it would be worth your time to check if these trends are going to continue.

Sociedad Química y Minera de Chile does have some risks, we noticed 3 warning signs (and 1 which is potentially serious) we think you should know about.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com