Svenska Cellulosa Aktiebolaget (STO:SCA B) Could Be Struggling To Allocate Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Svenska Cellulosa Aktiebolaget (STO:SCA B) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What Is It?

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. Analysts use this formula to calculate it for Svenska Cellulosa Aktiebolaget:

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

0.015 = kr2.1b ÷ (kr150b - kr9.8b) (Based on the trailing twelve months to March 2024).

So, Svenska Cellulosa Aktiebolaget has an ROCE of 1.5%. Ultimately, that's a low return and it under-performs the Forestry industry average of 9.1%.

See our latest analysis for Svenska Cellulosa Aktiebolaget

In the above chart we have measured Svenska Cellulosa Aktiebolaget's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Svenska Cellulosa Aktiebolaget .

So How Is Svenska Cellulosa Aktiebolaget's ROCE Trending?

On the surface, the trend of ROCE at Svenska Cellulosa Aktiebolaget doesn't inspire confidence. To be more specific, ROCE has fallen from 6.7% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

The Bottom Line On Svenska Cellulosa Aktiebolaget's ROCE

We're a bit apprehensive about Svenska Cellulosa Aktiebolaget because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Yet despite these poor fundamentals, the stock has gained a huge 125% over the last five years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

On a separate note, we've found 3 warning signs for Svenska Cellulosa Aktiebolaget you'll probably want to know about.

While Svenska Cellulosa Aktiebolaget may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.