Returns At Holmen (STO:HOLM B) Appear To Be Weighed Down

To find a multi-bagger stock, what are the underlying trends we should look for in a business? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. Although, when we looked at Holmen (STO:HOLM B), it didn't seem to tick all of these boxes.

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)

0.047 = kr2.7b ÷ (kr64b - kr5.2b) (Based on the trailing twelve months to September 2021).

So, Holmen has an ROCE of 4.7%. Ultimately, that's a low return and it under-performs the Forestry industry average of 6.7%.

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 to see what analysts are forecasting going forward, you should check out our free report for Holmen.

So How Is Holmen's ROCE Trending?

In terms of Holmen's historical ROCE trend, it doesn't exactly demand attention. The company has consistently earned 4.7% for the last five years, and the capital employed within the business has risen 109% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

On a side note, Holmen has done well to reduce current liabilities to 8.2% of total assets over the last five years. Effectively suppliers now fund less of the business, which can lower some elements of risk.

What We Can Learn From Holmen's ROCE

In summary, Holmen has simply been reinvesting capital and generating the same low rate of return as before. Yet to long term shareholders the stock has gifted them an incredible 207% return in the last five years, so the market appears to be rosy about its future. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

One more thing: We've identified 4 warning signs with Holmen (at least 1 which is a bit unpleasant) , and understanding these would certainly be useful.

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.