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If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at PPG Industries (NYSE:PPG), it didn't seem to tick all of these boxes.
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Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for PPG Industries:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.16 = US$2.2b ÷ (US$19b - US$5.0b) (Based on the trailing twelve months to December 2024).
So, PPG Industries has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the Chemicals industry average of 8.4% it's much better.
See our latest analysis for PPG Industries
In the above chart we have measured PPG Industries' 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 PPG Industries .
The Trend Of ROCE
Things have been pretty stable at PPG Industries, 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 unless we see a substantial change at PPG Industries in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger. With fewer investment opportunities, it makes sense that PPG Industries has been paying out a decent 32% of its earnings to shareholders. Unless businesses have highly compelling growth opportunities, they'll typically return some money to shareholders.
Our Take On PPG Industries' ROCE
In a nutshell, PPG Industries has been trudging along with the same returns from the same amount of capital over the last five years. Unsurprisingly, the stock has only gained 30% 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.