Returns At Scandinavian Tobacco Group (CPH:STG) Are On The Way Up

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at Scandinavian Tobacco Group (CPH:STG) and its trend of ROCE, we really liked what we saw.

Understanding 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 Scandinavian Tobacco Group is:

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

0.12 = kr.1.7b ÷ (kr.16b - kr.1.6b) (Based on the trailing twelve months to December 2023).

So, Scandinavian Tobacco Group has an ROCE of 12%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Tobacco industry average of 14%.

Check out our latest analysis for Scandinavian Tobacco Group

Above you can see how the current ROCE for Scandinavian Tobacco Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Scandinavian Tobacco Group .

How Are Returns Trending?

Scandinavian Tobacco Group has not disappointed with their ROCE growth. The figures show that over the last five years, ROCE has grown 49% whilst employing roughly the same amount of capital. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

Our Take On Scandinavian Tobacco Group's ROCE

As discussed above, Scandinavian Tobacco Group appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Since the stock has returned a solid 92% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. In light of that, we think it's worth looking further into this stock because if Scandinavian Tobacco Group can keep these trends up, it could have a bright future ahead.

If you want to continue researching Scandinavian Tobacco Group, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Scandinavian Tobacco Group isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.