Return Trends At AAK AB (publ.) (STO:AAK) Aren't Appealing

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. That's why when we briefly looked at AAK AB (publ.)'s (STO:AAK) ROCE trend, we were pretty happy with what we saw.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on AAK AB (publ.) is:

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

0.14 = kr2.5b ÷ (kr33b - kr16b) (Based on the trailing twelve months to June 2022).

Thus, AAK AB (publ.) has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Food industry average of 8.0% it's much better.

See our latest analysis for AAK AB (publ.)

Above you can see how the current ROCE for AAK AB (publ.) compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

The Trend Of ROCE

While the current returns on capital are decent, they haven't changed much. The company has consistently earned 14% for the last five years, and the capital employed within the business has risen 44% in that time. 14% is a pretty standard return, and it provides some comfort knowing that AAK AB (publ.) has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

On another note, while the change in ROCE trend might not scream for attention, it's interesting that the current liabilities have actually gone up over the last five years. This is intriguing because if current liabilities hadn't increased to 47% of total assets, this reported ROCE would probably be less than14% because total capital employed would be higher.The 14% ROCE could be even lower if current liabilities weren't 47% of total assets, because the the formula would show a larger base of total capital employed. So with current liabilities at such high levels, this effectively means the likes of suppliers or short-term creditors are funding a meaningful part of the business, which in some instances can bring some risks.

Our Take On AAK AB (publ.)'s ROCE

To sum it up, AAK AB (publ.) has simply been reinvesting capital steadily, at those decent rates of return. Therefore it's no surprise that shareholders have earned a respectable 54% return if they held over the last five years. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.

Like most companies, AAK AB (publ.) does come with some risks, and we've found 1 warning sign that you should be aware of.

While AAK AB (publ.) 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.