There Are Reasons To Feel Uneasy About Axfood's (STO:AXFO) Returns On Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. Having said that, while the ROCE is currently high for Axfood (STO:AXFO), we aren't jumping out of our chairs because returns are decreasing.

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 Axfood is:

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

0.23 = kr2.9b ÷ (kr25b - kr13b) (Based on the trailing twelve months to June 2022).

Thus, Axfood has an ROCE of 23%. In absolute terms that's a great return and it's even better than the Consumer Retailing industry average of 11%.

See our latest analysis for Axfood

Above you can see how the current ROCE for Axfood 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 Axfood.

How Are Returns Trending?

In terms of Axfood's historical ROCE movements, the trend isn't fantastic. While it's comforting that the ROCE is high, five years ago it was 39%. 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, Axfood has a high ratio of current liabilities to total assets of 50%. 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.

Our Take On Axfood's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Axfood is reinvesting for growth and has higher sales as a result. And long term investors must be optimistic going forward because the stock has returned a huge 171% to shareholders in the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.

Axfood does have some risks though, and we've spotted 2 warning signs for Axfood that you might be interested in.

Axfood 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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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.