The Returns At Stora Enso Oyj (HEL:STERV) Aren't Growing

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. That's why when we briefly looked at Stora Enso Oyj's (HEL:STERV) ROCE trend, we were pretty happy with what we saw.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed 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)

0.10 = €1.7b ÷ (€21b - €3.7b) (Based on the trailing twelve months to September 2022).

Thus, Stora Enso Oyj has an ROCE of 10%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Forestry industry average of 12%.

Check out 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 to see what analysts are forecasting going forward, you should check out our free report for Stora Enso Oyj.

How Are Returns Trending?

While the returns on capital are good, they haven't moved much. The company has employed 97% more capital in the last five years, and the returns on that capital have remained stable at 10%. Since 10% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

The Key Takeaway

The main thing to remember is that Stora Enso Oyj has proven its ability to continually reinvest at respectable rates of return. However, over the last five years, the stock has only delivered a 14% return to shareholders who held over that period. So to determine if Stora Enso Oyj is a multi-bagger going forward, we'd suggest digging deeper into the company's other fundamentals.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Stora Enso Oyj (of which 1 is concerning!) that you should know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.