Did you know there are some financial metrics that can provide clues of a potential 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Ergo, when we looked at the ROCE trends at NewMarket (NYSE:NEU), we liked what we saw.
What Is Return On Capital Employed (ROCE)?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for NewMarket:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.20 = US$391m ÷ (US$2.4b - US$424m) (Based on the trailing twelve months to December 2022).
So, NewMarket has an ROCE of 20%. In absolute terms that's a great return and it's even better than the Chemicals industry average of 11%.
See our latest analysis for NewMarket
Historical performance is a great place to start when researching a stock so above you can see the gauge for NewMarket's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of NewMarket, check out these free graphs here.
SWOT Analysis for NewMarket
- Earnings growth over the past year exceeded the industry.
- Debt is well covered by earnings.
- Dividend is low compared to the top 25% of dividend payers in the Chemicals market.
- Current share price is above our estimate of fair value.
- NEU's financial characteristics indicate limited near-term opportunities for shareholders.
- Lack of analyst coverage makes it difficult to determine NEU's earnings prospects.
- Debt is not well covered by operating cash flow.
- Dividends are not covered by cash flow.
How Are Returns Trending?
NewMarket deserves to be commended in regards to it's returns. The company has employed 42% more capital in the last five years, and the returns on that capital have remained stable at 20%. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. You'll see this when looking at well operated businesses or favorable business models.
What We Can Learn From NewMarket's ROCE
In summary, we're delighted to see that NewMarket has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. However, over the last five years, the stock has only delivered a 1.7% return to shareholders who held over that period. That's why it could be worth your time looking into this stock further to discover if it has more traits of a multi-bagger.
If you'd like to know more about NewMarket, we've spotted 3 warning signs, and 1 of them shouldn't be ignored.
High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.
Valuation is complex, but we're here to simplify it.
Discover if NewMarket might be undervalued or overvalued with our detailed analysis, featuring fair value estimates, potential risks, dividends, insider trades, and its financial condition.
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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:NEU
NewMarket
Through its subsidiaries, primarily engages in the manufacture and sale of petroleum additives.
Solid track record established dividend payer.
