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What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, Corteva (NYSE:CTVA) looks quite promising in regards to its trends of return on capital.
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. Analysts use this formula to calculate it for Corteva:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.08 = US$2.6b ÷ (US$42b - US$9.6b) (Based on the trailing twelve months to December 2021).
So, Corteva has an ROCE of 8.0%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 11%.
View our latest analysis for Corteva
Above you can see how the current ROCE for Corteva compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What Does the ROCE Trend For Corteva Tell Us?
Corteva has not disappointed in regards to ROCE growth. The figures show that over the last three years, returns on capital have grown by 456%. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. Speaking of capital employed, the company is actually utilizing 66% less than it was three years ago, which can be indicative of a business that's improving its efficiency. Corteva may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.
On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 23% of the business, which is more than it was three years ago. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.
What We Can Learn From Corteva's ROCE
In a nutshell, we're pleased to see that Corteva has been able to generate higher returns from less capital. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 20% return over the last year. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.