The Returns On Capital At Nilörngruppen (STO:NIL B) Don't Inspire Confidence

There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Looking at Nilörngruppen (STO:NIL B), it does have a high ROCE right now, but lets see how returns are trending.

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. The formula for this calculation on Nilörngruppen is:

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

0.25 = kr67m ÷ (kr465m - kr196m) (Based on the trailing twelve months to March 2021).

So, Nilörngruppen has an ROCE of 25%. In absolute terms that's a great return and it's even better than the Luxury industry average of 10%.

Check out our latest analysis for Nilörngruppen

In the above chart we have measured Nilörngruppen's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Can We Tell From Nilörngruppen's ROCE Trend?

On the surface, the trend of ROCE at Nilörngruppen doesn't inspire confidence. Historically returns on capital were even higher at 46%, but they have dropped over the last five years. 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'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.

On a separate but related note, it's important to know that Nilörngruppen has a current liabilities to total assets ratio of 42%, which we'd consider pretty high. 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

To conclude, we've found that Nilörngruppen is reinvesting in the business, but returns have been falling. Although the market must be expecting these trends to improve because the stock has gained 88% over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

One more thing to note, we've identified 3 warning signs with Nilörngruppen and understanding them should be part of your investment process.

Nilörngruppen is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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