Husqvarna (STO:HUSQ B) Hasn't Managed To Accelerate Its Returns

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. With that in mind, the ROCE of Husqvarna (STO:HUSQ B) looks decent, right now, so lets see what the trend of returns can tell us.

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 Husqvarna, this is the formula:

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

0.12 = kr5.0b ÷ (kr66b - kr22b) (Based on the trailing twelve months to March 2023).

Therefore, Husqvarna has an ROCE of 12%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Machinery industry average of 13%.

See our latest analysis for Husqvarna

Above you can see how the current ROCE for Husqvarna compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Husqvarna here for free.

SWOT Analysis for Husqvarna

How Are Returns Trending?

While the returns on capital are good, they haven't moved much. The company has consistently earned 12% for the last five years, and the capital employed within the business has risen 54% in that time. Since 12% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

The Bottom Line

In the end, Husqvarna has proven its ability to adequately reinvest capital at good rates of return. And given the stock has only risen 22% over the last five years, we'd suspect the market is beginning to recognize these trends. So to determine if Husqvarna is a multi-bagger going forward, we'd suggest digging deeper into the company's other fundamentals.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for Husqvarna (of which 1 shouldn't be ignored!) that you should know about.

While Husqvarna 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.