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How Has Chemtrade Logistics Income Fund (TSE:CHE.UN) Allocated Its Capital?

Simply Wall St
·3 min read

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. So after glancing at the trends within Chemtrade Logistics Income Fund (TSE:CHE.UN), we weren't too hopeful.

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

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Chemtrade Logistics Income Fund:

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

0.0028 = CA$6.5m ÷ (CA$2.6b - CA$322m) (Based on the trailing twelve months to September 2020).

So, Chemtrade Logistics Income Fund has an ROCE of 0.3%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 7.1%.

See our latest analysis for Chemtrade Logistics Income Fund

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Above you can see how the current ROCE for Chemtrade Logistics Income Fund compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Chemtrade Logistics Income Fund.

What Can We Tell From Chemtrade Logistics Income Fund's ROCE Trend?

We are a bit worried about the trend of returns on capital at Chemtrade Logistics Income Fund. About five years ago, returns on capital were 3.1%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. 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 Chemtrade Logistics Income Fund becoming one if things continue as they have.

Our Take On Chemtrade Logistics Income Fund's ROCE

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. It should come as no surprise then that the stock has fallen 34% over the last five years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

If you want to know some of the risks facing Chemtrade Logistics Income Fund we've found 2 warning signs (1 is a bit concerning!) that you should be aware of before investing here.

While Chemtrade Logistics Income Fund may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

This article by Simply Wall St is general in nature. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.