If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. That's why when we briefly looked at AB SKF's (STO:SKF B) ROCE trend, we were pretty happy with what we saw.
Return On Capital Employed (ROCE): What Is It?
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 AB SKF, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.12 = kr9.2b ÷ (kr107b - kr28b) (Based on the trailing twelve months to June 2022).
So, AB SKF has an ROCE of 12%. That's a relatively normal return on capital, and it's around the 15% 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 Can We Tell From AB SKF's ROCE Trend?
While the returns on capital are good, they haven't moved much. Over the past five years, ROCE has remained relatively flat at around 12% and the business has deployed 28% more capital into its operations. 12% 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.
What We Can Learn From AB SKF's ROCE
In the end, AB SKF has proven its ability to adequately reinvest capital at good rates of return. And given the stock has only risen 21% over the last five years, we'd suspect the market is beginning to recognize these trends. 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.
AB SKF does have some risks though, and we've spotted 1 warning sign for AB SKF that you might be interested in.
While AB SKF may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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.
