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What Do The Returns On Capital At Ingevity (NYSE:NGVT) Tell Us?

Simply Wall St
·3 mins read

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Ingevity (NYSE:NGVT), 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. Analysts use this formula to calculate it for Ingevity:

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

0.14 = US$273m ÷ (US$2.2b - US$188m) (Based on the trailing twelve months to June 2020).

So, Ingevity has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Chemicals industry average of 9.6% it's much better.

See our latest analysis for Ingevity

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Above you can see how the current ROCE for Ingevity compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Ingevity here for free.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Ingevity doesn't inspire confidence. Over the last five years, returns on capital have decreased to 14% from 31% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. 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.

In Conclusion...

To conclude, we've found that Ingevity is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 21% in the last three years. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

On a separate note, we've found 1 warning sign for Ingevity you'll probably want to know about.

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.

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