Corteva (NYSE:CTVA) Is Doing The Right Things To Multiply Its Share Price

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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. So when we looked at Corteva (NYSE:CTVA) and its trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Corteva:

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

0.08 = US$2.6b ÷ (US$42b - US$9.6b) (Based on the trailing twelve months to December 2021).

So, Corteva has an ROCE of 8.0%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 11%.

View our latest analysis for Corteva

In the above chart we have measured Corteva's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Corteva.

So How Is Corteva's ROCE Trending?

We're pretty happy with how the ROCE has been trending at Corteva. The data shows that returns on capital have increased by 456% over the trailing three years. The company is now earning US$0.08 per dollar of capital employed. Speaking of capital employed, the company is actually utilizing 66% less than it was three years ago, which can be indicative of a business that's improving its efficiency. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.

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. The current liabilities has increased to 23% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.

Our Take On Corteva's ROCE

In summary, it's great to see that Corteva has been able to turn things around and earn higher returns on lower amounts of capital. And with a respectable 20% awarded to those who held the stock over the last year, you could argue that these developments are starting to get the attention they deserve. In light of that, we think it's worth looking further into this stock because if Corteva can keep these trends up, it could have a bright future ahead.

While Corteva looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether CTVA is currently trading for a fair price.

While Corteva may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list 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.