Investors Will Want Calumet Specialty Products Partners' (NASDAQ:CLMT) Growth In ROCE To Persist

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So on that note, Calumet Specialty Products Partners (NASDAQ:CLMT) looks quite promising in regards to its trends of return on capital.

Understanding 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. The formula for this calculation on Calumet Specialty Products Partners is:

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

0.16 = US$263m ÷ (US$2.8b - US$1.1b) (Based on the trailing twelve months to December 2023).

Thus, Calumet Specialty Products Partners has an ROCE of 16%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Oil and Gas industry average of 14%.

Check out our latest analysis for Calumet Specialty Products Partners

Above you can see how the current ROCE for Calumet Specialty Products Partners 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 Calumet Specialty Products Partners for free.

The Trend Of ROCE

Calumet Specialty Products Partners is showing promise given that its ROCE is trending up and to the right. The figures show that over the last five years, ROCE has grown 47% whilst employing roughly the same amount of capital. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 40% of the business, which is more than it was five years ago. And with current liabilities at those levels, that's pretty high.

What We Can Learn From Calumet Specialty Products Partners' ROCE

To sum it up, Calumet Specialty Products Partners is collecting higher returns from the same amount of capital, and that's impressive. Since the stock has returned a staggering 317% to shareholders over the last five years, it looks like investors are recognizing these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

On a final note, we found 3 warning signs for Calumet Specialty Products Partners (2 can't be ignored) you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.