H & M Hennes & Mauritz (STO:HM B) May Have Issues Allocating Its Capital

Simply Wall St
December 21, 2021
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If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at H & M Hennes & Mauritz (STO:HM B), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

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 H & M Hennes & Mauritz:

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

0.11 = kr13b ÷ (kr185b - kr63b) (Based on the trailing twelve months to August 2021).

So, H & M Hennes & Mauritz has an ROCE of 11%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Specialty Retail industry average of 13%.

View our latest analysis for H & M Hennes & Mauritz

OM:HM B Return on Capital Employed December 21st 2021

Above you can see how the current ROCE for H & M Hennes & Mauritz 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 H & M Hennes & Mauritz here for free.

What Does the ROCE Trend For H & M Hennes & Mauritz Tell Us?

In terms of H & M Hennes & Mauritz's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 11% from 40% five years ago. However it looks like H & M Hennes & Mauritz might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

In Conclusion...

In summary, H & M Hennes & Mauritz is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors appear hesitant that the trends will pick up because the stock has fallen 20% in the last five years. Therefore based on the analysis done in this article, we don't think H & M Hennes & Mauritz has the makings of a multi-bagger.

If you want to continue researching H & M Hennes & Mauritz, you might be interested to know about the 1 warning sign that our analysis has discovered.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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