If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. So, when we ran our eye over Sweco's (STO:SWEC B) trend of ROCE, we liked what we saw.
Understanding Return On Capital Employed (ROCE)
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. Analysts use this formula to calculate it for Sweco:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.16 = kr2.6b ÷ (kr26b - kr9.4b) (Based on the trailing twelve months to June 2023).
So, Sweco has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the Construction industry average of 10% it's much better.
See our latest analysis for Sweco
Above you can see how the current ROCE for Sweco 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 Sweco here for free.
So How Is Sweco's ROCE Trending?
While the returns on capital are good, they haven't moved much. The company has consistently earned 16% for the last five years, and the capital employed within the business has risen 65% in that time. Since 16% 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 On Sweco's ROCE
To sum it up, Sweco has simply been reinvesting capital steadily, at those decent rates of return. And the stock has followed suit returning a meaningful 41% to shareholders over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.
Like most companies, Sweco does come with some risks, and we've found 1 warning sign 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.
About OM:SWEC B
Sweco
Provides architecture and engineering consultancy services worldwide.
Flawless balance sheet with reasonable growth potential and pays a dividend.
