Svenska Cellulosa Aktiebolaget (STO:SCA B) May Have Issues Allocating Its Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think Svenska Cellulosa Aktiebolaget (STO:SCA B) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. 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)

0.016 = kr2.3b ÷ (kr149b - kr7.4b) (Based on the trailing twelve months to June 2024).

Thus, Svenska Cellulosa Aktiebolaget has an ROCE of 1.6%. In absolute terms, that's a low return and it also under-performs the Forestry industry average of 7.3%.

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'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Svenska Cellulosa Aktiebolaget .

The Trend Of ROCE

On the surface, the trend of ROCE at Svenska Cellulosa Aktiebolaget doesn't inspire confidence. To be more specific, ROCE has fallen from 6.9% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line

In summary, Svenska Cellulosa Aktiebolaget is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Although the market must be expecting these trends to improve because the stock has gained 64% over the last five years. 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 3 warning signs for Svenska Cellulosa Aktiebolaget that we think you should be aware of.

While Svenska Cellulosa Aktiebolaget isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.