Here's What's Concerning About Fagerhult Group's (STO:FAG) Returns On Capital

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. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Fagerhult Group (STO:FAG) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. The formula for this calculation on Fagerhult Group is:

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

0.08 = kr940m ÷ (kr14b - kr1.9b) (Based on the trailing twelve months to September 2023).

Therefore, Fagerhult Group has an ROCE of 8.0%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 13%.

See our latest analysis for Fagerhult Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for Fagerhult Group's ROCE against it's prior returns. If you'd like to look at how Fagerhult Group has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From Fagerhult Group's ROCE Trend?

On the surface, the trend of ROCE at Fagerhult Group doesn't inspire confidence. Over the last five years, returns on capital have decreased to 8.0% from 12% 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. If these investments prove successful, this can bode very well for long term stock performance.

Our Take On Fagerhult Group's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Fagerhult Group. These trends are starting to be recognized by investors since the stock has delivered a 0.6% gain to shareholders who've held over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

On a final note, we've found 1 warning sign for Fagerhult Group that we think you should be aware of.

While Fagerhult Group isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.