Götenehus Group (STO:GHUS B) May Have Issues Allocating Its Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. However, after briefly looking over the numbers, we don't think Götenehus Group (STO:GHUS B) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding 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. To calculate this metric for Götenehus Group, this is the formula:

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

0.01 = kr12m ÷ (kr1.8b - kr688m) (Based on the trailing twelve months to December 2022).

Thus, Götenehus Group has an ROCE of 1.0%. Ultimately, that's a low return and it under-performs the Consumer Durables industry average of 7.3%.

Check out our latest analysis for Götenehus Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for Götenehus Group's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Götenehus Group, check out these free graphs here.

The Trend Of ROCE

On the surface, the trend of ROCE at Götenehus Group doesn't inspire confidence. Over the last five years, returns on capital have decreased to 1.0% from 22% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

In Conclusion...

Bringing it all together, while we're somewhat encouraged by Götenehus Group's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 34% over the last five years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Götenehus Group has the makings of a multi-bagger.

If you'd like to know more about Götenehus Group, we've spotted 4 warning signs, and 2 of them are significant.

While Götenehus Group 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.