Some Investors May Be Worried About Embellence Group's (STO:EMBELL) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Embellence Group (STO:EMBELL) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is 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. To calculate this metric for Embellence Group, this is the formula:

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

0.10 = kr58m ÷ (kr872m - kr312m) (Based on the trailing twelve months to June 2023).

Thus, Embellence Group has an ROCE of 10%. On its own, that's a standard return, however it's much better than the 7.9% generated by the Consumer Durables industry.

Check out our latest analysis for Embellence Group

Above you can see how the current ROCE for Embellence Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Embellence Group.

What Does the ROCE Trend For Embellence Group Tell Us?

In terms of Embellence Group's historical ROCE movements, the trend isn't fantastic. Around four years ago the returns on capital were 20%, but since then they've fallen to 10%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Key Takeaway

In summary, Embellence Group is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has declined 32% over the last year, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Embellence Group has the makings of a multi-bagger.

Embellence Group does have some risks though, and we've spotted 5 warning signs for Embellence Group that you might be interested in.

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.