If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Sociedad Química y Minera de Chile (NYSE:SQM), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What is it?

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. The formula for this calculation on Sociedad Química y Minera de Chile is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)

0.084 = US$456m ÷ (US$6.0b – US$581m) (Based on the trailing twelve months to June 2021).

Therefore, Sociedad Química y Minera de Chile has an ROCE of 8.4%. In absolute terms, that's a low return but it's around the Chemicals industry average of 9.8%.

View our latest analysis for Sociedad Química y Minera de Chile

Above you can see how the current ROCE for Sociedad Química y Minera de Chile compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Sociedad Química y Minera de Chile.

What Does the ROCE Trend For Sociedad Química y Minera de Chile Tell Us?

In terms of Sociedad Química y Minera de Chile's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 11% over the last five years. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Bottom Line On Sociedad Química y Minera de Chile's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Sociedad Química y Minera de Chile is reinvesting for growth and has higher sales as a result. And the stock has done incredibly well with a 127% return over the last five years, so long term investors are no doubt ecstatic with that result. So should these growth trends continue, we'd be optimistic on the stock going forward.

If you want to know some of the risks facing Sociedad Química y Minera de Chile we've found 2 warning signs (1 can't be ignored!) that you should be aware of before investing here.

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. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.