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

If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at H & M Hennes & Mauritz (STO:HM B), it didn't seem to tick all of these boxes.

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

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. 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)

0.16 = kr18b ÷ (kr180b - kr67b) (Based on the trailing twelve months to November 2024).

Therefore, H & M Hennes & Mauritz has an ROCE of 16%. On its own, that's a standard return, however it's much better than the 7.8% generated by the Specialty Retail industry.

See our latest analysis for H & M Hennes & Mauritz

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're interested, you can view the analysts predictions in our free analyst report for H & M Hennes & Mauritz .

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

On the surface, the trend of ROCE at H & M Hennes & Mauritz doesn't inspire confidence. Over the last five years, returns on capital have decreased to 16% from 24% five years ago. 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's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Bottom Line On H & M Hennes & Mauritz's ROCE

Bringing it all together, while we're somewhat encouraged by H & M Hennes & Mauritz's reinvestment in its own business, we're aware that returns are shrinking. And investors may be recognizing these trends since the stock has only returned a total of 32% to shareholders over the last five years. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

One more thing, we've spotted 1 warning sign facing H & M Hennes & Mauritz that you might find interesting.

While H & M Hennes & Mauritz 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.