We Like These Underlying Return On Capital Trends At Scandinavian Tobacco Group (CPH:STG)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at Scandinavian Tobacco Group (CPH:STG) so let's look a bit deeper.

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Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Scandinavian Tobacco Group, this is the formula:

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

0.11 = kr.1.6b ÷ (kr.17b - kr.2.8b) (Based on the trailing twelve months to December 2024).

So, Scandinavian Tobacco Group has an ROCE of 11%. That's a relatively normal return on capital, and it's around the 13% generated by the Tobacco industry.

View 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, you can check out the forecasts from the analysts covering Scandinavian Tobacco Group for free.

What Can We Tell From Scandinavian Tobacco Group's ROCE Trend?

Scandinavian Tobacco Group's ROCE growth is quite impressive. The figures show that over the last five years, ROCE has grown 31% 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. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

The Key Takeaway

In summary, we're delighted to see that Scandinavian Tobacco Group has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 47% return over the last five years. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

Like most companies, Scandinavian Tobacco Group does come with some risks, and we've found 1 warning sign that you should be aware of.

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.