Returns On Capital Are Showing Encouraging Signs At Scandinavian Tobacco Group (CPH:STG)

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at Scandinavian Tobacco Group (CPH:STG) so let's look a bit deeper.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its 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)

0.14 = kr.1.8b ÷ (kr.14b - kr.1.6b) (Based on the trailing twelve months to September 2021).

Therefore, Scandinavian Tobacco Group has an ROCE of 14%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Tobacco industry average of 15%.

Check out our latest analysis for Scandinavian Tobacco Group

In the above chart we have measured Scandinavian Tobacco Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Scandinavian Tobacco Group.

So How Is Scandinavian Tobacco Group's ROCE Trending?

Scandinavian Tobacco Group's ROCE growth is quite impressive. The figures show that over the last five years, ROCE has grown 77% whilst employing roughly the same amount of capital. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

The Bottom Line

To sum it up, Scandinavian Tobacco Group is collecting higher returns from the same amount of capital, and that's impressive. Since the stock has returned a solid 62% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

If you'd like to know about the risks facing Scandinavian Tobacco Group, we've discovered 1 warning sign that you should be aware of.

While Scandinavian Tobacco Group may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.