Returns On Capital Signal Tricky Times Ahead For H & M Hennes & Mauritz (STO:HM B)

There are a few key trends to look for if we want to identify the next multi-bagger. 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. 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 H & M Hennes & Mauritz (STO:HM 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 H & M Hennes & Mauritz, this is the formula:

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

0.056 = kr6.4b ÷ (kr179b - kr65b) (Based on the trailing twelve months to February 2023).

Therefore, H & M Hennes & Mauritz has an ROCE of 5.6%. In absolute terms, that's a low return but it's around the Specialty Retail industry average of 6.5%.

View 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 report on analyst forecasts for the company.

What The Trend Of ROCE Can 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 5.6% from 27% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

Our Take On H & M Hennes & Mauritz's ROCE

While returns have fallen for H & M Hennes & Mauritz in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. In light of this, the stock has only gained 40% over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

Like most companies, H & M Hennes & Mauritz does come with some risks, and we've found 2 warning signs that you should be aware of.

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.