If you’re not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we’d want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it’s a business that is reinvesting profits at increasing rates of return. With that in mind, we’ve noticed some promising trends at Dow (NYSE:DOW) so let’s look a bit deeper.
What is Return On Capital Employed (ROCE)?
For those that aren’t sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Dow:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.15 = US$7.2b ÷ (US$62b – US$13b) (Based on the trailing twelve months to September 2021).
Therefore, Dow has an ROCE of 15%. In absolute terms, that’s a satisfactory return, but compared to the Chemicals industry average of 11% it’s much better.
Above you can see how the current ROCE for Dow compares to its prior returns on capital, but there’s only so much you can tell from the past. If you’d like, you can check out the forecasts from the analysts covering Dow here for free.
So How Is Dow’s ROCE Trending?
Dow is showing promise given that its ROCE is trending up and to the right. The figures show that over the last two years, ROCE has grown 96% whilst employing roughly the same amount of capital. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company’s efficiencies. The company is doing well in that sense, and it’s worth investigating what the management team has planned for long term growth prospects.
To sum it up, Dow is collecting higher returns from the same amount of capital, and that’s impressive. And with a respectable 9.4% awarded to those who held the stock over the last year, you could argue that these developments are starting to get the attention they deserve. So given the stock has proven it has promising trends, it’s worth researching the company further to see if these trends are likely to persist.
Dow does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those makes us a bit uncomfortable…
While Dow may not currently earn the highest returns, we’ve compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.