Holmen (STO:HOLM B) Is Doing The Right Things To Multiply Its Share Price

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. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. So when we looked at Holmen (STO:HOLM B) and its trend of ROCE, we really liked what we saw.

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 Holmen, this is the formula:

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

0.076 = kr5.2b ÷ (kr74b - kr6.6b) (Based on the trailing twelve months to June 2022).

Therefore, Holmen has an ROCE of 7.6%. Ultimately, that's a low return and it under-performs the Forestry industry average of 19%.

See our latest analysis for Holmen

In the above chart we have measured Holmen'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 Holmen here for free.

What Does the ROCE Trend For Holmen Tell Us?

While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. The data shows that returns on capital have increased substantially over the last five years to 7.6%. The amount of capital employed has increased too, by 141%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

On a related note, the company's ratio of current liabilities to total assets has decreased to 8.9%, which basically reduces it's funding from the likes of short-term creditors or suppliers. This tells us that Holmen has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

What We Can Learn From Holmen's ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Holmen has. Since the stock has returned a staggering 148% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Holmen can keep these trends up, it could have a bright future ahead.

Holmen does have some risks, we noticed 2 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

While Holmen 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.