If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, the ROCE of AB SKF (STO:SKF B) looks decent, right now, so lets see what the trend of returns can tell us.
What Is 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 AB SKF is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.11 = kr9.8b ÷ (kr112b - kr26b) (Based on the trailing twelve months to March 2023).
Therefore, AB SKF has an ROCE of 11%. That's a relatively normal return on capital, and it's around the 14% generated by the Machinery industry.
See our latest analysis for AB SKF
In the above chart we have measured AB SKF's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What Does the ROCE Trend For AB SKF Tell Us?
While the current returns on capital are decent, they haven't changed much. The company has consistently earned 11% for the last five years, and the capital employed within the business has risen 33% in that time. 11% is a pretty standard return, and it provides some comfort knowing that AB SKF has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.
Our Take On AB SKF's ROCE
In the end, AB SKF has proven its ability to adequately reinvest capital at good rates of return. However, over the last five years, the stock has only delivered a 18% return to shareholders who held over that period. That's why it could be worth your time looking into this stock further to discover if it has more traits of a multi-bagger.
On a separate note, we've found 2 warning signs for AB SKF you'll probably want to know about.
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.
About OM:SKF B
AB SKF
Designs, manufactures, and sells bearings and units, seals, lubrication systems, condition monitoring, and services worldwide.
Flawless balance sheet, undervalued and pays a dividend.
