Stock Analysis

Here's What To Make Of UPM-Kymmene Oyj's (HEL:UPM) Decelerating Rates Of Return

  •  Updated
HLSE:UPM
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There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. Although, when we looked at UPM-Kymmene Oyj (HEL:UPM), it didn't seem to tick all of these boxes.

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. To calculate this metric for UPM-Kymmene Oyj, this is the formula:

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

0.079 = €1.3b ÷ (€19b - €2.8b) (Based on the trailing twelve months to June 2022).

Thus, UPM-Kymmene Oyj has an ROCE of 7.9%. Ultimately, that's a low return and it under-performs the Forestry industry average of 11%.

View our latest analysis for UPM-Kymmene Oyj

roce
HLSE:UPM Return on Capital Employed October 5th 2022

Above you can see how the current ROCE for UPM-Kymmene Oyj compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What The Trend Of ROCE Can Tell Us

In terms of UPM-Kymmene Oyj's historical ROCE trend, it doesn't exactly demand attention. Over the past five years, ROCE has remained relatively flat at around 7.9% and the business has deployed 51% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

The Key Takeaway

Long story short, while UPM-Kymmene Oyj has been reinvesting its capital, the returns that it's generating haven't increased. Although the market must be expecting these trends to improve because the stock has gained 83% over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

UPM-Kymmene Oyj does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those shouldn't be ignored...

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.

Valuation is complex, but we're helping make it simple.

Find out whether UPM-Kymmene Oyj is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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About HLSE:UPM

UPM-Kymmene Oyj

UPM-Kymmene Oyj engages in the forest-based bio industry.

The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.

Analysis AreaScore (0-6)
Valuation1
Future Growth2
Past Performance2
Financial Health4
Dividends4

Read more about these checks in the individual report sections or in our analysis model.

Adequate balance sheet average dividend payer.