Returns On Capital Signal Tricky Times Ahead For NewMarket (NYSE:NEU)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at NewMarket (NYSE:NEU) and its ROCE trend, we weren't exactly thrilled.

What Is 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. The formula for this calculation on NewMarket is:

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

0.16 = US$313m ÷ (US$2.3b - US$426m) (Based on the trailing twelve months to September 2022).

So, NewMarket has an ROCE of 16%. On its own, that's a standard return, however it's much better than the 12% generated by the Chemicals industry.

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'd like to look at how NewMarket has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

In terms of NewMarket's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 16% from 24% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

In Conclusion...

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for NewMarket. And there could be an opportunity here if other metrics look good too, because the stock has declined 12% in the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

NewMarket does have some risks, we noticed 2 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

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

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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.