What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. Speaking of which, we noticed some great changes in AdvanSix's (NYSE:ASIX) returns on capital, so let's have a look.
Understanding Return On Capital Employed (ROCE)
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for AdvanSix:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.19 = US$214m ÷ (US$1.5b - US$351m) (Based on the trailing twelve months to September 2022).
So, AdvanSix has an ROCE of 19%. In absolute terms, that's a satisfactory return, but compared to the Chemicals industry average of 12% it's much better.
Check out the opportunities and risks within the US Chemicals industry.
In the above chart we have measured AdvanSix's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering AdvanSix here for free.
The Trend Of ROCE
The trends we've noticed at AdvanSix are quite reassuring. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 19%. Basically the business is earning more per dollar of capital invested and in addition to that, 51% more capital is being employed now too. So we're very much inspired by what we're seeing at AdvanSix thanks to its ability to profitably reinvest capital.
What We Can Learn From AdvanSix's ROCE
In summary, it's great to see that AdvanSix can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Since the total return from the stock has been almost flat over the last five years, there might be an opportunity here if the valuation looks good. With that in mind, we believe the promising trends warrant this stock for further investigation.
AdvanSix does have some risks though, and we've spotted 1 warning sign for AdvanSix that you might be interested in.
While AdvanSix 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.
About NYSE:ASIX
AdvanSix
Engages in the manufacture and sale of polymer resins in the United States and internationally.
Excellent balance sheet and good value.
