Slowing Rates Of Return At Dow (NYSE:DOW) Leave Little Room For Excitement

What are the early trends we should look for to identify a stock that could 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. However, after investigating Dow (NYSE:DOW), we don't think it's current trends fit the mold of a multi-bagger.

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 Dow:

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

0.096 = US$4.7b ÷ (US$59b - US$10b) (Based on the trailing twelve months to March 2023).

So, Dow has an ROCE of 9.6%. In absolute terms, that's a low return but it's around the Chemicals industry average of 11%.

See our latest analysis for Dow

In the above chart we have measured Dow's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

SWOT Analysis for Dow

What Can We Tell From Dow's ROCE Trend?

There hasn't been much to report for Dow's returns and its level of capital employed because both metrics have been steady for the past four years. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So don't be surprised if Dow doesn't end up being a multi-bagger in a few years time. With fewer investment opportunities, it makes sense that Dow has been paying out a decent 53% of its earnings to shareholders. Unless businesses have highly compelling growth opportunities, they'll typically return some money to shareholders.

The Key Takeaway

In summary, Dow isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Since the stock has gained an impressive 45% over the last three years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Like most companies, Dow does come with some risks, and we've found 3 warning signs that you should be aware of.

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

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.