The Returns On Capital At AB Fagerhult (publ.) (STO:FAG) Don't Inspire Confidence

What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. In light of that, when we looked at AB Fagerhult (publ.) (STO:FAG) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

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 AB Fagerhult (publ.), this is the formula:

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

0.064 = kr688m ÷ (kr13b - kr2.2b) (Based on the trailing twelve months to March 2022).

So, AB Fagerhult (publ.) has an ROCE of 6.4%. 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'd like to look at how AB Fagerhult (publ.) has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is AB Fagerhult (publ.)'s ROCE Trending?

On the surface, the trend of ROCE at AB Fagerhult (publ.) doesn't inspire confidence. Around five years ago the returns on capital were 13%, but since then they've fallen to 6.4%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. 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.

The Key Takeaway

Bringing it all together, while we're somewhat encouraged by AB Fagerhult (publ.)'s reinvestment in its own business, we're aware that returns are shrinking. And in the last five years, the stock has given away 35% so the market doesn't look too hopeful on these trends strengthening any time soon. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

AB Fagerhult (publ.) does have some risks though, and we've spotted 2 warning signs for AB Fagerhult (publ.) that you might be interested in.

While AB Fagerhult (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.

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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.