Investors Met With Slowing Returns on Capital At AB Volvo (STO:VOLV B)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. That's why when we briefly looked at AB Volvo's (STO:VOLV B) ROCE trend, we were pretty happy with what we saw.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on AB Volvo is:

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

0.12 = kr47b ÷ (kr629b - kr252b) (Based on the trailing twelve months to December 2022).

Therefore, AB Volvo has an ROCE of 12%. That's a relatively normal return on capital, and it's around the 13% generated by the Machinery industry.

See our latest analysis for AB Volvo

In the above chart we have measured AB Volvo'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 Volvo here for free.

How Are Returns Trending?

The trend of ROCE doesn't stand out much, but returns on a whole are decent. Over the past five years, ROCE has remained relatively flat at around 12% and the business has deployed 58% more capital into its operations. 12% is a pretty standard return, and it provides some comfort knowing that AB Volvo has consistently earned this amount. 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.

Another thing to note, AB Volvo has a high ratio of current liabilities to total assets of 40%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line On AB Volvo's ROCE

In the end, AB Volvo has proven its ability to adequately reinvest capital at good rates of return. Therefore it's no surprise that shareholders have earned a respectable 87% return if they held over the last five years. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

One final note, you should learn about the 2 warning signs we've spotted with AB Volvo (including 1 which is a bit concerning) .

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.