Here's What To Make Of Metsä Board Oyj's (HEL:METSB) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. Having said that, from a first glance at Metsä Board Oyj (HEL:METSB) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Metsä Board Oyj:

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

0.10 = €189m ÷ (€2.2b - €360m) (Based on the trailing twelve months to September 2020).

So, Metsä Board Oyj has an ROCE of 10%. In absolute terms, that's a satisfactory return, but compared to the Forestry industry average of 5.9% it's much better.

Check out our latest analysis for Metsä Board Oyj

Above you can see how the current ROCE for Metsä Board Oyj compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Metsä Board Oyj.

The Trend Of ROCE

Things have been pretty stable at Metsä Board Oyj, with its capital employed and returns on that capital staying somewhat the same for the last five years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. With that in mind, unless investment picks up again in the future, we wouldn't expect Metsä Board Oyj to be a multi-bagger going forward. That probably explains why Metsä Board Oyj has been paying out 69% of its earnings as dividends to shareholders. Most shareholders probably know this and own the stock for its dividend.

What We Can Learn From Metsä Board Oyj's ROCE

In summary, Metsä Board Oyj isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Since the stock has gained an impressive 92% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

On a separate note, we've found 1 warning sign for Metsä Board Oyj you'll probably want to know about.

While Metsä Board Oyj 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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