When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that’s often how a mature business shows signs of aging. This reveals that the company isn’t compounding shareholder wealth because returns are falling and its net asset base is shrinking. So after we looked into Dow (NYSE:DOW), the trends above didn’t look too great.
What Is Return On Capital Employed (ROCE)?
For those that aren’t sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Dow is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.036 = US$1.7b ÷ (US$57b – US$11b) (Based on the trailing twelve months to March 2025).
Therefore, Dow has an ROCE of 3.6%. 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 Dow’s prior ROCE against its prior performance, but the future is arguably more important. If you’re interested, you can view the analysts predictions in our free analyst report for Dow .
How Are Returns Trending?
There is reason to be cautious about Dow, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 7.4% that they were earning five years ago. On top of that, it’s worth noting that the amount of capital employed within the business has remained relatively steady. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren’t as high due potentially to new competition or smaller margins. If these trends continue, we wouldn’t expect Dow to turn into a multi-bagger.