Metsä Board Oyj (HEL:METSB) Is Looking To Continue Growing Its Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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 Metsä Board Oyj (HEL:METSB) and its trend of ROCE, we really liked what we saw.

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)

0.12 = €265m ÷ (€2.7b - €443m) (Based on the trailing twelve months to June 2021).

Therefore, Metsä Board Oyj has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Forestry industry average of 6.8% it's much better.

See our latest analysis for Metsä Board Oyj

In the above chart we have measured Metsä Board Oyj'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 Metsä Board Oyj.

The Trend Of ROCE

We like the trends that we're seeing from Metsä Board Oyj. Over the last five years, returns on capital employed have risen substantially to 12%. The amount of capital employed has increased too, by 36%. So we're very much inspired by what we're seeing at Metsä Board Oyj thanks to its ability to profitably reinvest capital.

Our Take On Metsä Board Oyj's ROCE

All in all, it's terrific to see that Metsä Board Oyj is reaping the rewards from prior investments and is growing its capital base. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

One more thing: We've identified 2 warning signs with Metsä Board Oyj (at least 1 which is potentially serious) , and understanding these would certainly be useful.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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This article by Simply Wall St is general in nature. 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.
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