Returns On Capital Signal Tricky Times Ahead For Stora Enso Oyj (HEL:STERV)

What trends should we look for it we want to identify stocks that can multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Stora Enso Oyj (HEL:STERV) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What Is It?

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. Analysts use this formula to calculate it for Stora Enso Oyj:

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

0.026 = €423m ÷ (€20b - €3.9b) (Based on the trailing twelve months to September 2024).

Thus, Stora Enso Oyj has an ROCE of 2.6%. In absolute terms, that's a low return and it also under-performs the Forestry industry average of 6.2%.

View our latest analysis for Stora Enso Oyj

In the above chart we have measured Stora Enso Oyj'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 Stora Enso Oyj for free.

So How Is Stora Enso Oyj's ROCE Trending?

When we looked at the ROCE trend at Stora Enso Oyj, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 2.6% from 7.7% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

What We Can Learn From Stora Enso Oyj's ROCE

In summary, we're somewhat concerned by Stora Enso Oyj's diminishing returns on increasing amounts of capital. Investors must expect better things on the horizon though because the stock has risen 1.8% in the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

Stora Enso Oyj could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for STERV on our platform quite valuable.

While Stora Enso Oyj 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.