Returns On Capital At Volvo Car AB (publ.) (STO:VOLCAR B) Paint A Concerning Picture

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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 Volvo Car AB (publ.) (STO:VOLCAR B) and its ROCE trend, we weren't exactly thrilled.

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. The formula for this calculation on Volvo Car AB (publ.) is:

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

0.093 = kr17b ÷ (kr331b - kr149b) (Based on the trailing twelve months to December 2022).

So, Volvo Car AB (publ.) has an ROCE of 9.3%. In absolute terms, that's a low return but it's around the Auto industry average of 10%.

See our latest analysis for Volvo Car AB (publ.)

Above you can see how the current ROCE for Volvo Car AB (publ.) 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 Volvo Car AB (publ.).

What Can We Tell From Volvo Car AB (publ.)'s ROCE Trend?

When we looked at the ROCE trend at Volvo Car AB (publ.), we didn't gain much confidence. Around five years ago the returns on capital were 15%, but since then they've fallen to 9.3%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

On a separate but related note, it's important to know that Volvo Car AB (publ.) has a current liabilities to total assets ratio of 45%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line On Volvo Car AB (publ.)'s ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Volvo Car AB (publ.). However, despite the promising trends, the stock has fallen 28% over the last year, so there might be an opportunity here for astute investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

If you want to continue researching Volvo Car AB (publ.), you might be interested to know about the 1 warning sign that our analysis has discovered.

While Volvo Car AB (publ.) isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.