Garo Aktiebolag (STO:GARO) Might Become A Compounding Machine

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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So, when we ran our eye over Garo Aktiebolag's (STO:GARO) trend of ROCE, we really liked what we saw.

What Is Return On Capital Employed (ROCE)?

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 Garo Aktiebolag, this is the formula:

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

0.39 = kr248m ÷ (kr940m - kr309m) (Based on the trailing twelve months to June 2022).

Thus, Garo Aktiebolag has an ROCE of 39%. That's a fantastic return and not only that, it outpaces the average of 16% earned by companies in a similar industry.

Our analysis indicates that GARO is potentially undervalued!

In the above chart we have measured Garo Aktiebolag'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 Garo Aktiebolag here for free.

What Can We Tell From Garo Aktiebolag's ROCE Trend?

We'd be pretty happy with returns on capital like Garo Aktiebolag. The company has employed 170% more capital in the last five years, and the returns on that capital have remained stable at 39%. Now considering ROCE is an attractive 39%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. If Garo Aktiebolag can keep this up, we'd be very optimistic about its future.

On a side note, Garo Aktiebolag has done well to reduce current liabilities to 33% of total assets over the last five years. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.

Our Take On Garo Aktiebolag's ROCE

In short, we'd argue Garo Aktiebolag has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. And the stock has done incredibly well with a 137% return over the last five years, so long term investors are no doubt ecstatic with that result. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.

While Garo Aktiebolag looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether GARO is currently trading for a fair price.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.