Yahoo Finance Returns On Capital Signal Difficult Times Ahead For EMS-CHEMIE HOLDING (VTX:EMSN)
If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. And from a first read, things don't look too good at EMS-CHEMIE HOLDING (VTX:EMSN), so let's see why.
Understanding 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. Analysts use this formula to calculate it for EMS-CHEMIE HOLDING:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.23 = CHF493m ÷ (CHF2.5b - CHF308m) (Based on the trailing twelve months to December 2023).
Therefore, EMS-CHEMIE HOLDING has an ROCE of 23%. That's a fantastic return and not only that, it outpaces the average of 13% earned by companies in a similar industry.
See our latest analysis for EMS-CHEMIE HOLDING
In the above chart we have measured EMS-CHEMIE HOLDING'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 analyst report for EMS-CHEMIE HOLDING .
What The Trend Of ROCE Can Tell Us
We are a bit worried about the trend of returns on capital at EMS-CHEMIE HOLDING. To be more specific, the ROCE was 31% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on EMS-CHEMIE HOLDING becoming one if things continue as they have.
The Bottom Line On EMS-CHEMIE HOLDING's ROCE
In summary, it's unfortunate that EMS-CHEMIE HOLDING is generating lower returns from the same amount of capital. Despite the concerning underlying trends, the stock has actually gained 32% over the last five years, so it might be that the investors are expecting the trends to reverse. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.
If you'd like to know about the risks facing EMS-CHEMIE HOLDING, we've discovered 1 warning sign that you should be aware of.
If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.
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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.
