Stock Analysis

We Think Sylvamo (NYSE:SLVM) Might Have The DNA Of A Multi-Bagger

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To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at the ROCE trend of Sylvamo (NYSE:SLVM) we really liked what we saw.

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 Sylvamo, this is the formula:

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

0.28 = US$556m ÷ (US$2.7b - US$728m) (Based on the trailing twelve months to December 2022).

Thus, Sylvamo has an ROCE of 28%. In absolute terms that's a great return and it's even better than the Forestry industry average of 18%.

Check out our latest analysis for Sylvamo

NYSE:SLVM Return on Capital Employed March 15th 2023

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 here for free.

What The Trend Of ROCE Can Tell Us

We're pretty happy with how the ROCE has been trending at Sylvamo. The figures show that over the last three years, returns on capital have grown by 62%. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. In regards to capital employed, Sylvamo appears to been achieving more with less, since the business is using 31% less capital to run its operation. Sylvamo may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 27% of its operations, which isn't ideal. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

Our Take On Sylvamo's ROCE

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 a respectable 35% awarded to those who held the stock over the last year, you could argue that these developments are starting to get the attention they deserve. 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 though, and we've spotted 2 warning signs for Sylvamo that you might be interested in.

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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