Innospec (NASDAQ:IOSP) Has More To Do To Multiply In Value Going Forward

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. Although, when we looked at Innospec (NASDAQ:IOSP), it didn't seem to tick all of these boxes.

What Is 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. The formula for this calculation on Innospec is:

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

0.13 = US$177m ÷ (US$1.7b - US$372m) (Based on the trailing twelve months to December 2023).

So, Innospec has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Chemicals industry average of 9.7% it's much better.

Check out our latest analysis for Innospec

Above you can see how the current ROCE for Innospec 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 Innospec for free.

What The Trend Of ROCE Can Tell Us

There hasn't been much to report for Innospec's returns and its level of capital employed because both metrics have been steady for the past five years. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. With that in mind, unless investment picks up again in the future, we wouldn't expect Innospec to be a multi-bagger going forward.

In Conclusion...

We can conclude that in regards to Innospec's returns on capital employed and the trends, there isn't much change to report on. Since the stock has gained an impressive 52% over the last five years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

If you want to continue researching Innospec, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Innospec isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.