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Here's What To Make Of Albemarle's (NYSE:ALB) Decelerating Rates Of Return

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If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Albemarle (NYSE:ALB), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

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. The formula for this calculation on Albemarle is:

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

0.073 = US$681m ÷ (US$11b - US$2.1b) (Based on the trailing twelve months to March 2022).

So, Albemarle has an ROCE of 7.3%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 12%.

View our latest analysis for Albemarle

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In the above chart we have measured Albemarle'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 Albemarle.

So How Is Albemarle's ROCE Trending?

The returns on capital haven't changed much for Albemarle in recent years. Over the past five years, ROCE has remained relatively flat at around 7.3% and the business has deployed 51% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

The Bottom Line On Albemarle's ROCE

As we've seen above, Albemarle's returns on capital haven't increased but it is reinvesting in the business. Since the stock has gained an impressive 97% over the last five years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

One more thing to note, we've identified 3 warning signs with Albemarle and understanding these should be part of your investment process.

While Albemarle 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.