The Returns On Capital At Quaker Chemical (NYSE:KWR) Don't Inspire Confidence

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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Quaker Chemical (NYSE:KWR) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What is it?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Quaker Chemical, this is the formula:

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

0.074 = US$188m ÷ (US$2.9b - US$400m) (Based on the trailing twelve months to June 2021).

Thus, Quaker Chemical has an ROCE of 7.4%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 9.8%.

View our latest analysis for Quaker Chemical

Above you can see how the current ROCE for Quaker Chemical 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 Quaker Chemical here for free.

The Trend Of ROCE

In terms of Quaker Chemical's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 7.4% from 14% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

The Key Takeaway

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Quaker Chemical. And long term investors must be optimistic going forward because the stock has returned a huge 145% to shareholders in the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.

On a final note, we found 2 warning signs for Quaker Chemical (1 is significant) you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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.

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