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. However, after investigating Schweitzer-Mauduit International (NYSE:SWM), we don't think it's current trends fit the mold of a multi-bagger.
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. Analysts use this formula to calculate it for Schweitzer-Mauduit International:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.098 = US$141m ÷ (US$1.6b - US$159m) (Based on the trailing twelve months to September 2020).
Therefore, Schweitzer-Mauduit International has an ROCE of 9.8%. In absolute terms, that's a low return but it's around the Forestry industry average of 9.1%.
Above you can see how the current ROCE for Schweitzer-Mauduit International 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.
So How Is Schweitzer-Mauduit International's ROCE Trending?
There are better returns on capital out there than what we're seeing at Schweitzer-Mauduit International. The company has consistently earned 9.8% for the last five years, and the capital employed within the business has risen 43% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.
The Key Takeaway
Long story short, while Schweitzer-Mauduit International has been reinvesting its capital, the returns that it's generating haven't increased. And with the stock having returned a mere 18% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.
One more thing, we've spotted 2 warning signs facing Schweitzer-Mauduit International that you might find interesting.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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