Air Products and Chemicals' (NYSE:APD) Returns Have Hit A Wall

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Although, when we looked at Air Products and Chemicals (NYSE:APD), it didn't seem to tick all of these boxes.

What Is 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. The formula for this calculation on Air Products and Chemicals is:

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

0.099 = US$2.4b ÷ (US$27b - US$3.4b) (Based on the trailing twelve months to June 2022).

Therefore, Air Products and Chemicals has an ROCE of 9.9%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 12%.

View our latest analysis for Air Products and Chemicals

roce
roce

Above you can see how the current ROCE for Air Products and Chemicals compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Air Products and Chemicals here for free.

What Does the ROCE Trend For Air Products and Chemicals Tell Us?

The returns on capital haven't changed much for Air Products and Chemicals in recent years. The company has employed 56% more capital in the last five years, and the returns on that capital have remained stable at 9.9%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

The Bottom Line On Air Products and Chemicals' ROCE

Long story short, while Air Products and Chemicals has been reinvesting its capital, the returns that it's generating haven't increased. Although the market must be expecting these trends to improve because the stock has gained 75% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Air Products and Chemicals does have some risks though, and we've spotted 1 warning sign for Air Products and Chemicals that you might be interested in.

While Air Products and Chemicals isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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

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.

Join A Paid User Research Session
You’ll receive a US$30 Amazon Gift card for 1 hour of your time while helping us build better investing tools for the individual investors like yourself. Sign up here