In This Article:
If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Air Products and Chemicals (NYSE:APD) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
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 Air Products and Chemicals, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.095 = US$2.3b ÷ (US$27b - US$2.6b) (Based on the trailing twelve months to December 2021).
Therefore, Air Products and Chemicals has an ROCE of 9.5%. In absolute terms, that's a low return but it's around the Chemicals industry average of 12%.
See our latest analysis for Air Products and Chemicals
In the above chart we have measured Air Products and Chemicals' 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 report for Air Products and Chemicals.
What The Trend Of ROCE Can Tell Us
On the surface, the trend of ROCE at Air Products and Chemicals doesn't inspire confidence. Around five years ago the returns on capital were 12%, but since then they've fallen to 9.5%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.
Our Take On Air Products and Chemicals' ROCE
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Air Products and Chemicals. Furthermore the stock has climbed 79% over the last five years, it would appear that investors are upbeat about the future. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.