Here's What's Concerning About Corteva (NYSE:CTVA)
What underlying fundamental trends can indicate that a company might be in decline? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. So after glancing at the trends within Corteva (NYSE:CTVA), we weren't too hopeful.
Return On Capital Employed (ROCE): What is it?
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 Corteva:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.032 = US$1.1b ÷ (US$42b - US$7.7b) (Based on the trailing twelve months to September 2020).
Therefore, Corteva has an ROCE of 3.2%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 8.1%.
Check out our latest analysis for Corteva
Above you can see how the current ROCE for Corteva 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 Corteva.
The Trend Of ROCE
There is reason to be cautious about Corteva, given the returns are trending downwards. To be more specific, the ROCE was 4.1% two 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 Corteva becoming one if things continue as they have.
The Bottom Line
In summary, it's unfortunate that Corteva is generating lower returns from the same amount of capital. Yet despite these concerning fundamentals, the stock has performed strongly with a 46% return over the last year, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.
One more thing, we've spotted 1 warning sign facing Corteva that you might find interesting.
While Corteva 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.
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