AB Fagerhult (publ.) (STO:FAG) Is Reinvesting At Lower Rates Of Return

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. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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 investigating AB Fagerhult (publ.) (STO:FAG), we don't think it's current trends fit the mold of a multi-bagger.

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

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for AB Fagerhult (publ.), this is the formula:

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

0.063 = kr701m ÷ (kr13b - kr2.0b) (Based on the trailing twelve months to September 2022).

Therefore, AB Fagerhult (publ.) has an ROCE of 6.3%. Ultimately, that's a low return and it under-performs the Electrical industry average of 15%.

Check out our latest analysis for AB Fagerhult (publ.)

Historical performance is a great place to start when researching a stock so above you can see the gauge for AB Fagerhult (publ.)'s ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of AB Fagerhult (publ.), check out these free graphs here.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at AB Fagerhult (publ.), we didn't gain much confidence. Over the last five years, returns on capital have decreased to 6.3% from 13% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

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

While returns have fallen for AB Fagerhult (publ.) in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. However, despite the promising trends, the stock has fallen 48% over the last five years, 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.

One final note, you should learn about the 3 warning signs we've spotted with AB Fagerhult (publ.) (including 1 which doesn't sit too well with us) .

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.