Returns On Capital Are A Standout For Sylvamo (NYSE:SLVM)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. With that in mind, the ROCE of Sylvamo (NYSE:SLVM) looks great, so lets see what the trend can tell us.

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Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Sylvamo, this is the formula:

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

0.23 = US$444m ÷ (US$2.6b - US$682m) (Based on the trailing twelve months to December 2024).

Thus, Sylvamo has an ROCE of 23%. In absolute terms that's a great return and it's even better than the Forestry industry average of 14%.

View our latest analysis for Sylvamo

In the above chart we have measured Sylvamo's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Sylvamo for free.

The Trend Of ROCE

You'd find it hard not to be impressed with the ROCE trend at Sylvamo. The data shows that returns on capital have increased by 34% over the trailing five years. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. Interestingly, the business may be becoming more efficient because it's applying 33% less capital than it was five years ago. Sylvamo may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.

The Key Takeaway

From what we've seen above, Sylvamo has managed to increase it's returns on capital all the while reducing it's capital base. And with the stock having performed exceptionally well over the last three years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if Sylvamo can keep these trends up, it could have a bright future ahead.

Sylvamo does have some risks, we noticed 2 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets 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.