The Returns On Capital At Götenehus Group (STO:GHUS B) Don't Inspire Confidence

What are the early trends we should look for to identify a stock that could multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Götenehus Group (STO:GHUS B) and its ROCE trend, we weren't exactly thrilled.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Götenehus Group:

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

0.024 = kr16m ÷ (kr1.4b - kr715m) (Based on the trailing twelve months to September 2022).

Therefore, Götenehus Group has an ROCE of 2.4%. Ultimately, that's a low return and it under-performs the Consumer Durables industry average of 7.6%.

Check out the opportunities and risks within the SE Consumer Durables industry.

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?

On the surface, the trend of ROCE at Götenehus Group doesn't inspire confidence. Around five years ago the returns on capital were 21%, but since then they've fallen to 2.4%. 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. If these investments prove successful, this can bode very well for long term stock performance.

Another thing to note, Götenehus Group has a high ratio of current liabilities to total assets of 52%. 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Götenehus Group. However, despite the promising trends, the stock has fallen 28% over the last five years, so there might be an opportunity here for astute investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

On a final note, we found 4 warning signs for Götenehus Group (3 are potentially serious) you should be aware of.

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.

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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.