If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. So on that note, Skåne-möllan (STO:SKMO) looks quite promising in regards to its trends of return on capital.
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 Skåne-möllan is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.16 = kr25m ÷ (kr179m - kr24m) (Based on the trailing twelve months to September 2021).
So, Skåne-möllan has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the Food industry average of 13% it's much better.
View our latest analysis for Skåne-möllan
Historical performance is a great place to start when researching a stock so above you can see the gauge for Skåne-möllan's ROCE against it's prior returns. If you're interested in investigating Skåne-möllan's past further, check out this free graph of past earnings, revenue and cash flow.
What The Trend Of ROCE Can Tell Us
Skåne-möllan's ROCE growth is quite impressive. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 339% over the last five years. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.
The Bottom Line
To bring it all together, Skåne-möllan has done well to increase the returns it's generating from its capital employed. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 76% return over the last five years. Therefore, we think it would be worth your time to check if these trends are going to continue.
Like most companies, Skåne-möllan does come with some risks, and we've found 2 warning signs that you should be aware of.
While Skåne-möllan isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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:SKMO
Flawless balance sheet and slightly overvalued.
