There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. However, after briefly looking over the numbers, we don't think Sociedad Química y Minera de Chile (NYSE:SQM) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
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. To calculate this metric for Sociedad Química y Minera de Chile, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.084 = US$456m ÷ (US$6.0b - US$581m) (Based on the trailing twelve months to June 2021).
Therefore, Sociedad Química y Minera de Chile has an ROCE of 8.4%. On its own, that's a low figure but it's around the 9.8% average generated by the Chemicals industry.
In the above chart we have measured Sociedad Química y Minera de Chile's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Sociedad Química y Minera de Chile.
So How Is Sociedad Química y Minera de Chile's ROCE Trending?
In terms of Sociedad Química y Minera de Chile's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 8.4% from 11% 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
What We Can Learn From Sociedad Química y Minera de Chile's ROCE
In summary, despite lower returns in the short term, we're encouraged to see that Sociedad Química y Minera de Chile is reinvesting for growth and has higher sales as a result. And long term investors must be optimistic going forward because the stock has returned a huge 153% to shareholders in the last five years. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.
If you want to know some of the risks facing Sociedad Química y Minera de Chile we've found 2 warning signs (1 doesn't sit too well with us!) that you should be aware of before investing here.
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.
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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.
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