To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at Corteva (NYSE:CTVA) and its trend of ROCE, we really liked what we saw.
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 Corteva:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.062 = US$2.0b ÷ (US$43b - US$10b) (Based on the trailing twelve months to December 2023).
So, Corteva has an ROCE of 6.2%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 9.9%.
In the above chart we have measured Corteva'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 Corteva .
So How Is Corteva's ROCE Trending?
We're pretty happy with how the ROCE has been trending at Corteva. We found that the returns on capital employed over the last five years have risen by 325%. The company is now earning US$0.06 per dollar of capital employed. Interestingly, the business may be becoming more efficient because it's applying 66% less capital than it was five years ago. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.
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 24% of the business, which is more than it was five 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.
The Key Takeaway
In a nutshell, we're pleased to see that Corteva has been able to generate higher returns from less capital. And with a respectable 23% awarded to those who held the stock over the last three years, you could argue that these developments are starting to get the attention they deserve. In light of that, we think it's worth looking further into this stock because if Corteva can keep these trends up, it could have a bright future ahead.
If you want to continue researching Corteva, you might be interested to know about the 1 warning sign that our analysis has discovered.
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.
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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.