Returns On Capital Are Showing Encouraging Signs At Investment AB Latour (STO:LATO B)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. Speaking of which, we noticed some great changes in Investment AB Latour's (STO:LATO B) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

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 Investment AB Latour is:

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

0.062 = kr2.7b ÷ (kr49b - kr5.7b) (Based on the trailing twelve months to March 2022).

Therefore, Investment AB Latour has an ROCE of 6.2%. Ultimately, that's a low return and it under-performs the Industrials industry average of 13%.

See our latest analysis for Investment AB Latour

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Investment AB Latour has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. Over the last five years, returns on capital employed have risen substantially to 6.2%. Basically the business is earning more per dollar of capital invested and in addition to that, 108% more capital is being employed now too. So we're very much inspired by what we're seeing at Investment AB Latour thanks to its ability to profitably reinvest capital.

What We Can Learn From Investment AB Latour's ROCE

To sum it up, Investment AB Latour has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And a remarkable 147% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

If you'd like to know about the risks facing Investment AB Latour, we've discovered 2 warning signs that you should be aware of.

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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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.