Returns Are Gaining Momentum At Essity (STO:ESSITY B)

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in Essity's (STO:ESSITY B) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What Is It?

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 Essity, this is the formula:

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

0.13 = kr18b ÷ (kr203b - kr67b) (Based on the trailing twelve months to December 2023).

So, Essity has an ROCE of 13%. By itself that's a normal return on capital and it's in line with the industry's average returns of 13%.

View our latest analysis for Essity

In the above chart we have measured Essity'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 Essity for free.

What Does the ROCE Trend For Essity Tell Us?

The trends we've noticed at Essity are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 13%. Basically the business is earning more per dollar of capital invested and in addition to that, 21% more capital is being employed now too. So we're very much inspired by what we're seeing at Essity thanks to its ability to profitably reinvest capital.

Our Take On Essity's ROCE

To sum it up, Essity has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 5.1% to shareholders. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

Like most companies, Essity does come with some risks, and we've found 2 warning signs that you should be aware of.

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.