Returns On Capital At Billerud (STO:BILL) Have Hit The Brakes

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Billerud (STO:BILL) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is 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. Analysts use this formula to calculate it for Billerud:

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

0.079 = kr3.0b ÷ (kr50b - kr12b) (Based on the trailing twelve months to June 2023).

Thus, Billerud has an ROCE of 7.9%. In absolute terms, that's a low return and it also under-performs the Packaging industry average of 12%.

See our latest analysis for Billerud

Above you can see how the current ROCE for Billerud compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Billerud here for free.

What The Trend Of ROCE Can Tell Us

There are better returns on capital out there than what we're seeing at Billerud. Over the past five years, ROCE has remained relatively flat at around 7.9% and the business has deployed 51% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

Our Take On Billerud's ROCE

In summary, Billerud has simply been reinvesting capital and generating the same low rate of return as before. Unsurprisingly, the stock has only gained 2.4% over the last five years, which potentially indicates that investors are accounting for this going forward. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

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

While Billerud 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.