Returns On Capital At Dow (NYSE:DOW) Have Stalled

To find a multi-bagger stock, what are the underlying trends we should look for in a business? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Dow (NYSE:DOW) and its ROCE trend, we weren't exactly thrilled.

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. Analysts use this formula to calculate it for Dow:

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

0.072 = US$3.5b ÷ (US$58b - US$9.6b) (Based on the trailing twelve months to June 2023).

Therefore, Dow has an ROCE of 7.2%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 11%.

See our latest analysis for Dow

Above you can see how the current ROCE for Dow compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

So How Is Dow's ROCE Trending?

Over the past four years, Dow's ROCE and capital employed have both remained mostly flat. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. With that in mind, unless investment picks up again in the future, we wouldn't expect Dow to be a multi-bagger going forward. That probably explains why Dow has been paying out 68% of its earnings as dividends to shareholders. Most shareholders probably know this and own the stock for its dividend.

What We Can Learn From Dow's ROCE

In a nutshell, Dow has been trudging along with the same returns from the same amount of capital over the last four years. Since the stock has gained an impressive 23% over the last three 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'd like to know about the risks facing Dow, we've discovered 3 warning signs that you should be aware of.

While Dow 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.