We Like These Underlying Return On Capital Trends At Element Solutions (NYSE:ESI)
If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. With that in mind, we've noticed some promising trends at Element Solutions (NYSE:ESI) so let's look a bit deeper.
What Is Return On Capital Employed (ROCE)?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Element Solutions:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.073 = US$335m ÷ (US$4.9b - US$344m) (Based on the trailing twelve months to December 2022).
Thus, Element Solutions has an ROCE of 7.3%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 11%.
See our latest analysis for Element Solutions
In the above chart we have measured Element Solutions' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Element Solutions.
So How Is Element Solutions' ROCE Trending?
We're pretty happy with how the ROCE has been trending at Element Solutions. The figures show that over the last five years, returns on capital have grown by 201%. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. In regards to capital employed, Element Solutions appears to been achieving more with less, since the business is using 50% less capital to run its operation. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.
Our Take On Element Solutions' ROCE
In the end, Element Solutions has proven it's capital allocation skills are good with those higher returns from less amount of capital. Since the stock has returned a solid 98% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. In light of that, we think it's worth looking further into this stock because if Element Solutions can keep these trends up, it could have a bright future ahead.
One final note, you should learn about the 2 warning signs we've spotted with Element Solutions (including 1 which makes us a bit uncomfortable) .
While Element Solutions isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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