Here's What's Concerning About Compass Minerals International's (NYSE:CMP) Returns On Capital
What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think Compass Minerals International (NYSE:CMP) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
Return On Capital Employed (ROCE): What is it?
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. Analysts use this formula to calculate it for Compass Minerals International:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.071 = US$141m ÷ (US$2.3b - US$296m) (Based on the trailing twelve months to December 2020).
Therefore, Compass Minerals International has an ROCE of 7.1%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 9.5%.
See our latest analysis for Compass Minerals International
In the above chart we have measured Compass Minerals International's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Compass Minerals International here for free.
How Are Returns Trending?
On the surface, the trend of ROCE at Compass Minerals International doesn't inspire confidence. To be more specific, ROCE has fallen from 15% over the last five years. However it looks like Compass Minerals International might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
Our Take On Compass Minerals International's ROCE
Bringing it all together, while we're somewhat encouraged by Compass Minerals International's reinvestment in its own business, we're aware that returns are shrinking. And with the stock having returned a mere 15% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.
On a final note, we found 2 warning signs for Compass Minerals International (1 is a bit unpleasant) you should be aware of.
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.
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.
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