Returns On Capital Signal Tricky Times Ahead For UPM-Kymmene Oyj (HEL:UPM)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at UPM-Kymmene Oyj (HEL:UPM) and its ROCE trend, we weren't exactly thrilled.

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What Is Return On Capital Employed (ROCE)?

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

0.063 = €1.1b ÷ (€19b - €2.4b) (Based on the trailing twelve months to December 2024).

So, 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 6.2%.

See 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 to see what analysts are forecasting going forward, you should check out our free analyst report for UPM-Kymmene Oyj .

What Can We Tell From UPM-Kymmene Oyj's ROCE Trend?

On the surface, the trend of ROCE at UPM-Kymmene Oyj doesn't inspire confidence. Around five years ago the returns on capital were 10%, but since then they've fallen to 6.3%. However it looks like UPM-Kymmene Oyj might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

In Conclusion...

To conclude, we've found that UPM-Kymmene Oyj is reinvesting in the business, but returns have been falling. Unsurprisingly, the stock has only gained 18% over the last five years, which potentially indicates that investors are accounting for this going forward. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

UPM-Kymmene Oyj does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is significant...

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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.