Svenska Cellulosa Aktiebolaget (STO:SCA B) Is Looking To Continue Growing Its Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Svenska Cellulosa Aktiebolaget (STO:SCA B) and its trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested 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)

0.065 = kr7.6b ÷ (kr124b - kr8.0b) (Based on the trailing twelve months to June 2022).

Therefore, Svenska Cellulosa Aktiebolaget has an ROCE of 6.5%. In absolute terms, that's a low return and it also under-performs the Forestry industry average of 19%.

Check out 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'd like, you can check out the forecasts from the analysts covering Svenska Cellulosa Aktiebolaget here for free.

The Trend Of ROCE

We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. Over the last five years, returns on capital employed have risen substantially to 6.5%. Basically the business is earning more per dollar of capital invested and in addition to that, 154% more capital is being employed now too. So we're very much inspired by what we're seeing at Svenska Cellulosa Aktiebolaget thanks to its ability to profitably reinvest capital.

On a related note, the company's ratio of current liabilities to total assets has decreased to 6.4%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

The Key Takeaway

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 Svenska Cellulosa Aktiebolaget has. Since the stock has returned a staggering 157% to shareholders over the last five years, it looks like investors are recognizing these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

One final note, you should learn about the 2 warning signs we've spotted with Svenska Cellulosa Aktiebolaget (including 1 which can't be ignored) .

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.