In This Article:
If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating AdvanSix (NYSE:ASIX), we don't think it's current trends fit the mold of a multi-bagger.
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 AdvanSix:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.048 = US$59m ÷ (US$1.6b - US$357m) (Based on the trailing twelve months to December 2024).
Therefore, AdvanSix has an ROCE of 4.8%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 8.8%.
View our latest analysis for AdvanSix
In the above chart we have measured AdvanSix's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for AdvanSix .
What Can We Tell From AdvanSix's ROCE Trend?
When we looked at the ROCE trend at AdvanSix, we didn't gain much confidence. Around five years ago the returns on capital were 6.4%, but since then they've fallen to 4.8%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.
The Key Takeaway
In summary, AdvanSix is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Yet to long term shareholders the stock has gifted them an incredible 114% return in the last five years, so the market appears to be rosy about its future. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.
Like most companies, AdvanSix does come with some risks, and we've found 1 warning sign that you should be aware of.