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

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating AB Fagerhult (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?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on AB Fagerhult is:

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

0.05 = kr544m ÷ (kr13b - kr1.8b) (Based on the trailing twelve months to June 2021).

Thus, AB Fagerhult has an ROCE of 5.0%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 12%.

See our latest analysis for AB Fagerhult

Above you can see how the current ROCE for AB Fagerhult 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 AB Fagerhult.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at AB Fagerhult, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 5.0% from 13% five years ago. 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 may take some time before the company starts to see any change in earnings from these investments.

What We Can Learn From AB Fagerhult's ROCE

To conclude, we've found that AB Fagerhult is reinvesting in the business, but returns have been falling. And with the stock having returned a mere 7.0% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

AB Fagerhult does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is potentially serious...

While AB Fagerhult 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.

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.

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