Stagnant Returns at Element Solutions: Can Strategic Shifts Reinvigorate ROCE and Unlock Value?

For decades, Element Solutions (NYSE: ESI) has operated as a reliable but unexciting player in the chemicals industry. Its Return on Capital Employed (ROCE) of 7.9% as of May 2025, slightly below the sector average of 8.7%, underscores a business that has long traded growth for stability. Yet, the company's recent strategic moves—ranging from R&D optimization to aggressive debt reduction—hint at a potential pivot. The question for investors is whether these efforts can reignite ROCE and justify long-term optimism in a sector where margin compression and commoditization are relentless forces.

The Maturing Business Model

Element Solutions' ROCE stagnation reflects a mature business model. Over the past five years, its capital employed has remained relatively flat at around $4.5 billion, while EBIT growth has been modest. This suggests a company that has outgrown its high-growth phase, prioritizing operational consistency over disruptive reinvention. The 132% stock price gain since 2020—a period during which ROCE barely budged—was driven more by market-wide tailwinds and disciplined capital allocation than by transformative profitability.

The chemicals industry itself is a double-edged sword. While ESI's focus on high-margin electronics and specialty chemicals offers insulation from commodity price swings, it also exposes the firm to intense competition from global players. For example, would reveal ESI's relative stability but also highlight its lack of differentiation in a sector where innovation cycles are accelerating.

Strategic Shifts: R&D, Capital Allocation, and Shareholder Returns

The first quarter of 2025 offers a glimpse into ESI's evolving strategy. R&D expenses fell to $15.9 million, down from $18.1 million in the prior-year period. While this reduction might seem alarming, it aligns with a more targeted approach to innovation. The company emphasized progress in high-value niches like data centers and AI hardware, where margins are fatter and competition is less crowded. This shift could prove critical: would show a declining trend, but the quality of innovations may offset the lower input.

Capital allocation has been the most striking change. The sale of the Graphics business for $323 million in Q1 2025 exemplifies ESI's willingness to prune low-return assets. By prepaying $200 million in debt and reducing net leverage to 3.1x, the company has freed up cash that can now be redirected to higher-ROCE opportunities. This deleveraging is a double win: it lowers interest costs, improving net income, and reduces capital employed, which directly boosts ROCE.

Shareholder returns have also received attention. While ESI maintained its dividend at $19.8 million in Q1, the absence of buybacks suggests a cautious approach. However, the company's focus on deleveraging and portfolio optimization implies a long-term strategy to enhance returns by deploying capital more efficiently. For instance, would illustrate how debt reduction is creating flexibility to reinvest in core segments or reward shareholders.

The ROCE Outlook: A Balancing Act

Can these strategies reinvigorate ROCE? The math is promising. By reducing capital employed through asset sales and debt repayment, ESI can lift ROCE even if EBIT remains flat. For example, the $323 million from the Graphics divestiture could lower capital employed by roughly $300 million, potentially increasing ROCE by 100 basis points. Meanwhile, the electronics segment's adjusted EBITDA margin of 21.6% in Q1 2025 suggests that ESI can sustain profitability in high-margin areas.

However, risks persist. The chemicals industry is notoriously cyclical, and ESI's reliance on electronics exposes it to supply chain disruptions and demand volatility. If AI and data center growth slows, ESI's margins could face pressure. Moreover, R&D cuts, while prudent in the short term, could undermine long-term competitiveness if competitors outpace ESI in innovation.

Investment Implications

For investors, ESI presents a paradox: a mature company with a stable stock price but limited upside in ROCE. The recent strategic shifts—particularly the Graphics divestiture and deleveraging—suggest management is prioritizing capital efficiency. However, the lack of a clear growth story in R&D and the absence of aggressive buybacks temper enthusiasm.

A compelling case for ESI emerges if the company can execute its portfolio optimization and reinvest proceeds in high-ROCE opportunities. The electronics segment's 10% organic sales growth in 2024 and its 21.8% adjusted EBITDA margin indicate that ESI has the capability to generate returns in niche markets. Investors should monitor ESI's ability to maintain these margins while deploying capital more effectively.

would provide context for its relative performance, while would highlight the disconnect between market sentiment and fundamentals.

Conclusion

Element Solutions is neither a growth stock nor a value trap. Its stagnant ROCE reflects a mature business, but its strategic pivot toward high-margin electronics and disciplined capital allocation offers a path to reinvigorate returns. For long-term investors, the key will be whether ESI can sustain its focus on capital efficiency while navigating industry headwinds. Those willing to bet on management's execution may find ESI's stock attractive at current levels, but patience—and a watchful eye on ROCE—will be essential.