There Are Reasons To Feel Uneasy About AB Fagerhult's (STO:FAG) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at AB Fagerhult (STO:FAG) and its ROCE trend, we weren't exactly thrilled.

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 AB Fagerhult, this is the formula:

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

0.042 = kr455m ÷ (kr13b - kr1.7b) (Based on the trailing twelve months to March 2021).

So, AB Fagerhult has an ROCE of 4.2%. Ultimately, that's a low return and it under-performs the Electrical industry average of 13%.

View our latest analysis for AB Fagerhult

In the above chart we have measured AB Fagerhult's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering AB Fagerhult here for free.

What Does the ROCE Trend For AB Fagerhult Tell Us?

When we looked at the ROCE trend at AB Fagerhult, we didn't gain much confidence. Around five years ago the returns on capital were 11%, but since then they've fallen to 4.2%. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

The Bottom Line

In summary, we're somewhat concerned by AB Fagerhult's diminishing returns on increasing amounts of capital. Despite the concerning underlying trends, the stock has actually gained 18% over the last five years, so it might be that the investors are expecting the trends to reverse. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

AB Fagerhult does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is a bit concerning...

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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