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There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Sensient Technologies (NYSE:SXT) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
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. To calculate this metric for Sensient Technologies, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.10 = US$181m ÷ (US$2.0b - US$227m) (Based on the trailing twelve months to June 2024).
Thus, Sensient Technologies has an ROCE of 10%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Chemicals industry average of 8.9%.
See our latest analysis for Sensient Technologies
In the above chart we have measured Sensient Technologies' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Sensient Technologies .
The Trend Of ROCE
Things have been pretty stable at Sensient Technologies, with its capital employed and returns on that capital staying somewhat the same for the last five years. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So don't be surprised if Sensient Technologies doesn't end up being a multi-bagger in a few years time. With fewer investment opportunities, it makes sense that Sensient Technologies has been paying out a decent 43% of its earnings to shareholders. Unless businesses have highly compelling growth opportunities, they'll typically return some money to shareholders.
What We Can Learn From Sensient Technologies' ROCE
We can conclude that in regards to Sensient Technologies' returns on capital employed and the trends, there isn't much change to report on. Unsurprisingly, the stock has only gained 28% over the last five years, which potentially indicates that investors are accounting for this going forward. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.