What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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 Sylvamo (NYSE:SLVM), 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. Analysts use this formula to calculate it for Sylvamo:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.16 = US$354m ÷ (US$2.8b - US$649m) (Based on the trailing twelve months to March 2024).
So, Sylvamo has an ROCE of 16%. On its own, that's a standard return, however it's much better than the 13% generated by the Forestry industry.
Check out our latest analysis for Sylvamo
Above you can see how the current ROCE for Sylvamo 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 Sylvamo for free.
The Trend Of ROCE
Over the past four years, Sylvamo's ROCE has remained relatively flat while the business is using 23% less capital than before. To us that doesn't look like a multi-bagger because the company appears to be selling assets and it's returns aren't increasing. So if this trend continues, don't be surprised if the business is smaller in a few years time.
What We Can Learn From Sylvamo's ROCE
In summary, Sylvamo isn't reinvesting funds back into the business and returns aren't growing. Since the stock has gained an impressive 64% over the last year, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.
If you want to continue researching Sylvamo, you might be interested to know about the 3 warning signs that our analysis has discovered.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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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.
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About NYSE:SLVM
Sylvamo
Produces and markets uncoated freesheet for cutsize, offset paper, and pulp in Latin America, Europe, and North America.
Good value with adequate balance sheet.
