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If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Evonik Industries (ETR:EVK) and its ROCE trend, we weren't exactly thrilled.
Return On Capital Employed (ROCE): What Is It?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Evonik Industries, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.055 = €866m ÷ (€20b - €4.5b) (Based on the trailing twelve months to June 2024).
Therefore, Evonik Industries has an ROCE of 5.5%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 8.2%.
See our latest analysis for Evonik Industries
Above you can see how the current ROCE for Evonik Industries 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 analyst report for Evonik Industries .
The Trend Of ROCE
There hasn't been much to report for Evonik Industries' returns and its level of capital employed because both metrics have been steady for the past five years. 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 Evonik Industries in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger. On top of that you'll notice that Evonik Industries has been paying out a large portion (63%) of earnings in the form of dividends to shareholders. Most shareholders probably know this and own the stock for its dividend.
What We Can Learn From Evonik Industries' ROCE
In a nutshell, Evonik Industries has been trudging along with the same returns from the same amount of capital over the last five years. Additionally, the stock's total return to shareholders over the last five years has been flat, which isn't too surprising. 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.