Some Investors May Be Worried About Götenehus Group's (STO:GHUS B) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Götenehus Group (STO:GHUS B), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Götenehus Group is:

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

0.077 = kr41m ÷ (kr1.1b - kr546m) (Based on the trailing twelve months to September 2021).

So, Götenehus Group has an ROCE of 7.7%. In absolute terms, that's a low return and it also under-performs the Consumer Durables industry average of 15%.

View 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'd like to look at how Götenehus Group has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Götenehus Group's ROCE Trending?

When we looked at the ROCE trend at Götenehus Group, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 7.7% from 15% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, Götenehus Group's current liabilities are still rather high at 51% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line On Götenehus Group's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Götenehus Group is reinvesting for growth and has higher sales as a result. These trends are starting to be recognized by investors since the stock has delivered a 15% gain to shareholders who've held over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

On a final note, we found 5 warning signs for Götenehus Group (1 shouldn't be ignored) 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.