If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think SEB (EPA:SK) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
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. To calculate this metric for SEB, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.10 = €603m ÷ (€9.1b - €3.2b) (Based on the trailing twelve months to December 2022).
So, SEB has an ROCE of 10%. In isolation, that's a pretty standard return but against the Consumer Durables industry average of 18%, it's not as good.
Check out our latest analysis for SEB
Above you can see how the current ROCE for SEB 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 report for SEB.
How Are Returns Trending?
The trend of ROCE doesn't look fantastic because it's fallen from 13% five years ago, while the business's capital employed increased by 26%. Usually this isn't ideal, but given SEB conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. SEB probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.
In Conclusion...
Bringing it all together, while we're somewhat encouraged by SEB's reinvestment in its own business, we're aware that returns are shrinking. And investors appear hesitant that the trends will pick up because the stock has fallen 27% in the last five years. Therefore based on the analysis done in this article, we don't think SEB has the makings of a multi-bagger.
SEB does have some risks, we noticed 2 warning signs (and 1 which is a bit concerning) we think you should know about.
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.
About ENXTPA:SK
SEB
Designs, manufactures, and markets small domestic equipment worldwide.
Very undervalued with solid track record and pays a dividend.
