Returns On Capital At UPM-Kymmene Oyj (HEL:UPM) Paint A Concerning Picture

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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating UPM-Kymmene Oyj (HEL:UPM), we don't think it's current trends fit the mold of a multi-bagger.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on UPM-Kymmene Oyj is:

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

0.074 = €1.2b ÷ (€19b - €2.7b) (Based on the trailing twelve months to September 2023).

So, UPM-Kymmene Oyj has an ROCE of 7.4%. In absolute terms, that's a low return and it also under-performs the Forestry industry average of 12%.

View our latest analysis for UPM-Kymmene Oyj

In the above chart we have measured UPM-Kymmene 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 UPM-Kymmene Oyj here for free.

How Are Returns Trending?

On the surface, the trend of ROCE at UPM-Kymmene Oyj doesn't inspire confidence. Around five years ago the returns on capital were 12%, but since then they've fallen to 7.4%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line On UPM-Kymmene Oyj's ROCE

To conclude, we've found that UPM-Kymmene Oyj is reinvesting in the business, but returns have been falling. Since the stock has gained an impressive 90% over the last five years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

Like most companies, UPM-Kymmene Oyj does come with some risks, and we've found 2 warning signs that you should be aware of.

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. 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.