Returns On Capital At Element Solutions (NYSE:ESI) Have Stalled: What's Next?

Element Solutions (NYSE:ESI) has been a darling of the Basic Materials sector, known for its innovative solutions and strong financial performance. However, recent data shows that the company's returns on capital (ROC) have stagnated, raising concerns among investors. In this article, we'll delve into the factors contributing to this trend and explore potential solutions to reignite growth.

Factors Contributing to Stagnant ROC
1. Increased Competition: The Basic Materials sector is highly competitive, with numerous players vying for market share. Increased competition can lead to lower profit margins and reduced returns on capital. Element Solutions' operating margin has decreased from 14.4% in 2021 to 13.96% in the last twelve months, indicating that the company may be facing increased competition.
2. Slowing Revenue Growth: Element Solutions' revenue growth has slowed down in recent years. In 2021, the company's revenue grew by 10.8%, but in the last twelve months, the growth rate has decreased to 7.8%. This slower revenue growth can impact the company's ability to generate higher returns on capital.
3. Higher Capital Expenditure: The company has increased its capital expenditure, which can lead to a higher denominator in the calculation of returns on capital. In the last twelve months, Element Solutions' capital expenditure was -$62.50 million, compared to -$31.3 million in 2021. This increase in capital expenditure can lower the company's returns on capital.
4. Changes in the Industry: The chemical industry, in which Element Solutions operates, is cyclical and subject to changes in demand and pricing. Fluctuations in the industry can impact the company's ability to maintain high returns on capital.

Potential Solutions to Improve ROC
1. Increase R&D Spending: While Element Solutions' R&D expenses have been stable, the company could consider increasing its R&D spending as a percentage of licensing revenue to drive innovation and maintain its competitive edge. This could lead to new products, improved processes, and increased market share.
2. Optimize CapEx: Element Solutions could review its capital expenditure strategy to ensure that investments are aligned with expected returns. This could involve prioritizing projects with higher expected returns, improving project selection processes, or reducing investments in low-return projects.
3. Dividend Payout Ratio: Element Solutions' dividend payout ratio is 28.8%, which is lower than the Basic Materials sector average of 42.7%. The company could consider increasing its dividend payout ratio to return more capital to shareholders, while still maintaining a balance between reinvestment and distribution.
4. Share Buybacks: Element Solutions could also consider implementing a share buyback program to reduce the number of outstanding shares and increase shareholder value. This could be an alternative or complementary strategy to increasing dividends.



Conclusion
Element Solutions' stagnant returns on capital are a cause for concern, but not a reason to panic. By addressing the underlying factors contributing to this trend and implementing the suggested solutions, the company can reignite growth and improve its financial performance. As an investor, it's essential to stay informed about the company's progress and make data-driven decisions. Keep an eye on Element Solutions' future earnings reports and analyst recommendations to stay ahead of the curve.