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If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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 briefly looking over the numbers, we don't think Sensient Technologies (NYSE:SXT) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
What is 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. The formula for this calculation on Sensient Technologies is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.11 = US$175m ÷ (US$1.7b - US$199m) (Based on the trailing twelve months to March 2021).
Therefore, Sensient Technologies has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Chemicals industry average of 8.3% it's much better.
Above you can see how the current ROCE for Sensient Technologies 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 Sensient Technologies.
What Does the ROCE Trend For Sensient Technologies Tell Us?
Over the past five years, Sensient Technologies' ROCE and capital employed have both remained mostly flat. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. So unless we see a substantial change at Sensient Technologies in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger. This probably explains why Sensient Technologies is paying out 48% of its income to shareholders in the form of dividends. Unless businesses have highly compelling growth opportunities, they'll typically return some money to shareholders.
We can conclude that in regards to Sensient Technologies' returns on capital employed and the trends, there isn't much change to report on. And investors may be recognizing these trends since the stock has only returned a total of 36% to shareholders over the last five years. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.
Like most companies, Sensient Technologies does come with some risks, and we've found 2 warning signs that you should be aware of.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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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