Our Take On The Returns On Capital At Corteva (NYSE:CTVA)
There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Corteva (NYSE:CTVA) and its ROCE trend, we weren't exactly thrilled.
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. Analysts use this formula to calculate it for Corteva:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.036 = US$1.2b ÷ (US$42b - US$7.5b) (Based on the trailing twelve months to June 2020).
So, Corteva has an ROCE of 3.6%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 8.8%.
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 The Trend Of ROCE Can Tell Us
There hasn't been much to report for Corteva's returns and its level of capital employed because both metrics have been steady for the past two years. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. With that in mind, unless investment picks up again in the future, we wouldn't expect Corteva to be a multi-bagger going forward.
The Bottom Line On Corteva's ROCE
In summary, Corteva isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Since the stock has declined 18% over the last year, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Corteva has the makings of a multi-bagger.
Like most companies, Corteva does come with some risks, and we've found 2 warning signs that you should be aware of.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
This article by Simply Wall St is general in nature. 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.
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