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Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. Although, when we looked at BASF (ETR:BAS), it didn't seem to tick all of these boxes.
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 BASF:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.09 = €6.0b ÷ (€86b - €20b) (Based on the trailing twelve months to March 2023).
Therefore, BASF has an ROCE of 9.0%. In absolute terms, that's a low return but it's around the Chemicals industry average of 10%.
View our latest analysis for BASF
Above you can see how the current ROCE for BASF 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 BASF.
The Trend Of ROCE
There hasn't been much to report for BASF's returns and its level of capital employed because both metrics have been steady for the past five years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. With that in mind, unless investment picks up again in the future, we wouldn't expect BASF to be a multi-bagger going forward. With fewer investment opportunities, it makes sense that BASF has been paying out a decent 57% of its earnings to shareholders. Given the business isn't reinvesting in itself, it makes sense to distribute a portion of earnings among shareholders.
What We Can Learn From BASF's ROCE
We can conclude that in regards to BASF's returns on capital employed and the trends, there isn't much change to report on. Since the stock has declined 26% over the last five years, investors may not be too optimistic on this trend improving either. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.
If you want to know some of the risks facing BASF we've found 2 warning signs (1 is potentially serious!) that you should be aware of before investing here.