Returns On Capital At AB SKF (STO:SKF B) Have Hit The Brakes

What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at AB SKF (STO:SKF B) and its ROCE trend, we weren't exactly thrilled.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for AB SKF:

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

0.12 = kr9.9b ÷ (kr113b - kr29b) (Based on the trailing twelve months to September 2024).

Therefore, AB SKF has an ROCE of 12%. In isolation, that's a pretty standard return but against the Machinery industry average of 15%, it's not as good.

Check out 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'd like, you can check out the forecasts from the analysts covering AB SKF for free.

So How Is AB SKF's ROCE Trending?

There hasn't been much to report for AB SKF's returns and its level of capital employed because both metrics have been steady for the past five years. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So unless we see a substantial change at AB SKF in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger. This probably explains why AB SKF is paying out 46% of its income to shareholders in the form of dividends. Given the business isn't reinvesting in itself, it makes sense to distribute a portion of earnings among shareholders.

The Key Takeaway

In summary, AB SKF isn't compounding its earnings but is generating stable returns on the same amount of capital employed. And with the stock having returned a mere 30% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

On a separate note, we've found 1 warning sign for AB SKF you'll probably want to know about.

While AB SKF 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.