Svenska Cellulosa Aktiebolaget's (STO:SCA B) Returns Have Hit A Wall

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. 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?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Svenska Cellulosa Aktiebolaget, this is the formula:

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

0.048 = kr6.2b ÷ (kr138b - kr9.0b) (Based on the trailing twelve months to March 2023).

So, Svenska Cellulosa Aktiebolaget has an ROCE of 4.8%. 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'd like to see what analysts are forecasting going forward, you should check out our free report for Svenska Cellulosa Aktiebolaget.

So How Is Svenska Cellulosa Aktiebolaget's ROCE Trending?

The returns on capital haven't changed much for Svenska Cellulosa Aktiebolaget in recent years. The company has employed 162% more capital in the last five years, and the returns on that capital have remained stable at 4.8%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

The Key Takeaway

As we've seen above, Svenska Cellulosa Aktiebolaget's returns on capital haven't increased but it is reinvesting in the business. Since the stock has gained an impressive 72% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

If you'd like to know about the risks facing Svenska Cellulosa Aktiebolaget, we've discovered 1 warning sign that you should be aware of.

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.