Investors Could Be Concerned With UPM-Kymmene Oyj's (HEL:UPM) Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at UPM-Kymmene Oyj (HEL:UPM) and its ROCE trend, we weren't exactly thrilled.

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. 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)

0.063 = €977m ÷ (€19b - €3.2b) (Based on the trailing twelve months to June 2024).

Therefore, UPM-Kymmene Oyj has an ROCE of 6.3%. On its own that's a low return on capital but it's in line with the industry's average returns of 6.3%.

View our latest analysis for UPM-Kymmene Oyj

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'd like, you can check out the forecasts from the analysts covering UPM-Kymmene Oyj for free.

So How Is UPM-Kymmene Oyj's ROCE Trending?

In terms of UPM-Kymmene Oyj's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 12%, but since then they've fallen to 6.3%. And considering revenue has dropped while employing more capital, we'd be cautious. 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.

The Bottom Line On UPM-Kymmene Oyj's ROCE

In summary, we're somewhat concerned by UPM-Kymmene Oyj's diminishing returns on increasing amounts of capital. In spite of that, the stock has delivered a 31% return to shareholders who held over 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.

UPM-Kymmene Oyj does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those can't be ignored...

While UPM-Kymmene 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.

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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.