Returns At CF Industries Holdings (NYSE:CF) Appear To Be Weighed Down
What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think CF Industries Holdings (NYSE:CF) 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 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 CF Industries Holdings:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.063 = US$706m ÷ (US$12b - US$891m) (Based on the trailing twelve months to March 2021).
Therefore, CF Industries Holdings has an ROCE of 6.3%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 8.2%.
Check out our latest analysis for CF Industries Holdings
Above you can see how the current ROCE for CF Industries Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
So How Is CF Industries Holdings' ROCE Trending?
We've noticed that although returns on capital are flat over the last five years, the amount of capital employed in the business has fallen 22% in that same period. This indicates to us that assets are being sold and thus the business is likely shrinking, which you'll remember isn't the typical ingredients for an up-and-coming multi-bagger. Not only that, but the low returns on this capital mentioned earlier would leave most investors unimpressed.
The Bottom Line On CF Industries Holdings' ROCE
In summary, CF Industries Holdings isn't reinvesting funds back into the business and returns aren't growing. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 122% gain to shareholders who have held over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.
One final note, you should learn about the 2 warning signs we've spotted with CF Industries Holdings (including 1 which makes us a bit uncomfortable) .
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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