Stock Analysis

Volvo Car AB (publ.) (STO:VOLCAR B) Is Doing The Right Things To Multiply Its Share Price

OM:VOLCAR B
Source: Shutterstock

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Volvo Car AB (publ.) (STO:VOLCAR B) and its trend of ROCE, we really liked what we saw.

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

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Volvo Car AB (publ.), this is the formula:

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

0.13 = kr29b ÷ (kr386b - kr172b) (Based on the trailing twelve months to September 2024).

Therefore, Volvo Car AB (publ.) has an ROCE of 13%. By itself that's a normal return on capital and it's in line with the industry's average returns of 13%.

Check out our latest analysis for Volvo Car AB (publ.)

roce
OM:VOLCAR B Return on Capital Employed January 5th 2025

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, you can check out the forecasts from the analysts covering Volvo Car AB (publ.) for free.

How Are Returns Trending?

The trends we've noticed at Volvo Car AB (publ.) are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 13%. Basically the business is earning more per dollar of capital invested and in addition to that, 72% more capital is being employed now too. So we're very much inspired by what we're seeing at Volvo Car AB (publ.) thanks to its ability to profitably reinvest capital.

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 44%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

What We Can Learn From Volvo Car AB (publ.)'s ROCE

To sum it up, Volvo Car AB (publ.) has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And since the stock has dived 72% over the last three years, there may be other factors affecting the company's prospects. Still, it's worth doing some further research to see if the trends will continue into the future.

On the other side of ROCE, we have to consider valuation. That's why we have a FREE intrinsic value estimation for VOLCAR B on our platform that is definitely worth checking out.

While Volvo Car AB (publ.) may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

New: Manage All Your Stock Portfolios in One Place

We've created the ultimate portfolio companion for stock investors, and it's free.

• Connect an unlimited number of Portfolios and see your total in one currency
• Be alerted to new Warning Signs or Risks via email or mobile
• Track the Fair Value of your stocks

Try a Demo Portfolio for Free

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.