Can Svenska Cellulosa Aktiebolaget SCA (publ)'s (STO:SCA B) Weak Financials Pull The Plug On The Stock's Current Momentum On Its Share Price?

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Svenska Cellulosa Aktiebolaget (STO:SCA B) has had a great run on the share market with its stock up by a significant 5.4% over the last week. We, however wanted to have a closer look at its key financial indicators as the markets usually pay for long-term fundamentals, and in this case, they don't look very promising. In this article, we decided to focus on Svenska Cellulosa Aktiebolaget's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

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How To Calculate Return On Equity?

Return on equity can be calculated by using the formula:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Svenska Cellulosa Aktiebolaget is:

3.6% = kr3.8b ÷ kr104b (Based on the trailing twelve months to June 2025).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every SEK1 worth of equity, the company was able to earn SEK0.04 in profit.

See our latest analysis for Svenska Cellulosa Aktiebolaget

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

A Side By Side comparison of Svenska Cellulosa Aktiebolaget's Earnings Growth And 3.6% ROE

On the face of it, Svenska Cellulosa Aktiebolaget's ROE is not much to talk about. Next, when compared to the average industry ROE of 6.6%, the company's ROE leaves us feeling even less enthusiastic. For this reason, Svenska Cellulosa Aktiebolaget's five year net income decline of 18% is not surprising given its lower ROE. We reckon that there could also be other factors at play here. Such as - low earnings retention or poor allocation of capital.

So, as a next step, we compared Svenska Cellulosa Aktiebolaget's performance against the industry and were disappointed to discover that while the company has been shrinking its earnings, the industry has been growing its earnings at a rate of 6.5% over the last few years.

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is SCA B fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Svenska Cellulosa Aktiebolaget Using Its Retained Earnings Effectively?

Svenska Cellulosa Aktiebolaget's declining earnings is not surprising given how the company is spending most of its profits in paying dividends, judging by its three-year median payout ratio of 53% (or a retention ratio of 47%). The business is only left with a small pool of capital to reinvest - A vicious cycle that doesn't benefit the company in the long-run. Our risks dashboard should have the 2 risks we have identified for Svenska Cellulosa Aktiebolaget.

Additionally, Svenska Cellulosa Aktiebolaget has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 53%. Accordingly, forecasts suggest that Svenska Cellulosa Aktiebolaget's future ROE will be 4.3% which is again, similar to the current ROE.

Conclusion

On the whole, Svenska Cellulosa Aktiebolaget's performance is quite a big let-down. Because the company is not reinvesting much into the business, and given the low ROE, it's not surprising to see the lack or absence of growth in its earnings. That being so, the latest industry analyst forecasts show that the analysts are expecting to see a huge improvement in the company's earnings growth rate. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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.