Bulten (STO:BULTEN) May Have Issues Allocating Its Capital

There are a few key trends to look for if we want to identify the next multi-bagger. 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. However, after briefly looking over the numbers, we don't think Bulten (STO:BULTEN) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What Is It?

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 Bulten is:

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

0.042 = kr97m ÷ (kr3.6b - kr1.3b) (Based on the trailing twelve months to June 2022).

So, Bulten has an ROCE of 4.2%. In absolute terms, that's a low return and it also under-performs the Auto Components industry average of 6.5%.

View our latest analysis for Bulten

Above you can see how the current ROCE for Bulten 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 Bulten here for free.

What Does the ROCE Trend For Bulten Tell Us?

On the surface, the trend of ROCE at Bulten doesn't inspire confidence. Around five years ago the returns on capital were 14%, but since then they've fallen to 4.2%. 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'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.

What We Can Learn From Bulten's ROCE

To conclude, we've found that Bulten is reinvesting in the business, but returns have been falling. Since the stock has declined 39% over the last five years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Bulten has the makings of a multi-bagger.

One final note, you should learn about the 2 warning signs we've spotted with Bulten (including 1 which shouldn't be ignored) .

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.