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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. 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)
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. To calculate this metric for AAK AB (publ.), this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.14 = kr2.1b ÷ (kr25b - kr11b) (Based on the trailing twelve months to September 2021).
Thus, AAK AB (publ.) has an ROCE of 14%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Food industry average of 12%.
Check out our latest analysis for AAK AB (publ.)
In the above chart we have measured AAK AB (publ.)'s prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering AAK AB (publ.) here for free.
What The Trend Of ROCE Can Tell Us
While the current returns on capital are decent, they haven't changed much. Over the past five years, ROCE has remained relatively flat at around 14% and the business has deployed 26% more capital into its operations. 14% is a pretty standard return, and it provides some comfort knowing that AAK AB (publ.) has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.
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 43% 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 43% of total assets, because the the formula would show a larger base of total capital employed. Additionally, this high level of current liabilities isn't ideal because it means the company's suppliers (or short-term creditors) are effectively funding a large portion of the business.
Our Take On AAK AB (publ.)'s ROCE
In the end, AAK AB (publ.) has proven its ability to adequately reinvest capital at good rates of return. On top of that, the stock has rewarded shareholders with a remarkable 110% return to those who've 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.
While AAK AB (publ.) doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation on our platform.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.
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About OM:AAK
AAK AB (publ.)
Develops and sells plant-based oils and fats in Sweden and internationally.
Flawless balance sheet with solid track record and pays a dividend.
