UPM-Kymmene Oyj (HEL:UPM) May Have Issues Allocating Its Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher 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.

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Understanding 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. Analysts use this formula to calculate it for UPM-Kymmene Oyj:

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

0.059 = €903m ÷ (€18b - €2.8b) (Based on the trailing twelve months to June 2025).

So, UPM-Kymmene Oyj has an ROCE of 5.9%. In absolute terms, that's a low return but it's around the Forestry industry average of 6.6%.

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're interested, you can view the analysts predictions in our free analyst report for UPM-Kymmene Oyj .

The Trend Of ROCE

When we looked at the ROCE trend at UPM-Kymmene Oyj, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 5.9% from 7.9% five years ago. 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.

The Bottom Line On UPM-Kymmene Oyj's ROCE

Bringing it all together, while we're somewhat encouraged by UPM-Kymmene Oyj's reinvestment in its own business, we're aware that returns are shrinking. And investors may be recognizing these trends since the stock has only returned a total of 19% to shareholders over the last five years. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

UPM-Kymmene Oyj does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those doesn't sit too well with us...

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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.