Be Wary Of Svenska Cellulosa Aktiebolaget (STO:SCA B) And Its Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. Although, when we looked at Svenska Cellulosa Aktiebolaget (STO:SCA B), it didn't seem to tick all of these boxes.

What Is 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 Svenska Cellulosa Aktiebolaget is:

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

0.021 = kr2.9b ÷ (kr149b - kr7.9b) (Based on the trailing twelve months to September 2024).

Therefore, Svenska Cellulosa Aktiebolaget has an ROCE of 2.1%. Ultimately, that's a low return and it under-performs the Forestry industry average of 6.2%.

View our latest analysis for Svenska Cellulosa Aktiebolaget

Above you can see how the current ROCE for Svenska Cellulosa Aktiebolaget compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Svenska Cellulosa Aktiebolaget .

What Can We Tell From Svenska Cellulosa Aktiebolaget's ROCE Trend?

On the surface, the trend of ROCE at Svenska Cellulosa Aktiebolaget doesn't inspire confidence. Over the last five years, returns on capital have decreased to 2.1% from 6.3% five years ago. However it looks like Svenska Cellulosa Aktiebolaget might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

In Conclusion...

To conclude, we've found that Svenska Cellulosa Aktiebolaget is reinvesting in the business, but returns have been falling. Since the stock has gained an impressive 63% over the last five years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

On a final note, we've found 2 warning signs for Svenska Cellulosa Aktiebolaget that we think 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.