H & M Hennes & Mauritz (STO:HM B) Might Be Having Difficulty Using Its Capital Effectively

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. 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?

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. To calculate this metric for H & M Hennes & Mauritz, this is the formula:

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

0.17 = kr18b ÷ (kr180b - kr73b) (Based on the trailing twelve months to May 2024).

So, H & M Hennes & Mauritz has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 8.7% 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'd like, you can check out the forecasts from the analysts covering H & M Hennes & Mauritz for free.

The Trend Of ROCE

In terms of H & M Hennes & Mauritz's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 22%, but since then they've fallen to 17%. 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.

On a side note, H & M Hennes & Mauritz's current liabilities are still rather high at 40% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

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. Unsurprisingly, the stock has only gained 24% over the last five years, which potentially indicates that investors are accounting for this going forward. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

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.

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.

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