If we want to find a potential multi-bagger, there are often underlying trends that can provide clues. Typically, we will want to notice a growth trend to return to on capital employed (ROCE) and at the same time, a based capital employed. Basically, this means that a business has profitable initiatives that it can continue to reinvest in, which is a hallmark of a blending machine. However, after investigating Clas Ohlson (STO:CLAS B), we don’t think current trends fit the mold of a multi-bagger.
Understanding return on capital employed (ROCE)
If you’ve never worked with ROCE before, it measures the “yield” (pre-tax profit) a company generates from the capital used in its business. Analysts use this formula to calculate it for Clas Ohlson:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.17 = 622 million kr ÷ (6.4 billion kr – 2.7 billion kr) (Based on the last twelve months to October 2021).
Thereby, Clas Ohlson has a ROCE of 17%. By itself, that’s a standard return, but it’s far better than the 12% generated by the specialty retail industry.
See our latest analysis for Clas Ohlson
In the chart above, we measured Clas Ohlson’s past ROCE against his past performance, but the future is arguably more important. If you want to see what analysts are predicting for the future, you should check out our free report for Clas Ohlson.
What does Clas Ohlson’s ROCE trend tell us?
In terms of Clas Ohlson’s historic ROCE moves, the trend isn’t fantastic. About five years ago the return on capital was 28%, but since then it has fallen to 17%. Meanwhile, the company is using more capital, but that hasn’t changed much in terms of sales over the past 12 months, so that could reflect longer-term investments. It may take some time before the company begins to see a change in the income from these investments.
Furthermore, Clas Ohlson’s current liabilities are still quite high at 42% of total assets. This effectively means that suppliers (or short-term creditors) finance a large part of the business, so just be aware that this may introduce some elements of risk. Although this is not necessarily a bad thing, it can be beneficial if this ratio is lower.
The Key Takeaway
In summary, while we are somewhat encouraged by Clas Ohlson’s reinvestment in his own business, we are aware that returns are diminishing. And investors may recognize these trends since the stock has only returned 0.2% to shareholders in total over the past five years. So if you’re looking for a multi-bagger, we think you’d have better luck elsewhere.
One more thing we spotted 3 warning signs facing Clas Ohlson which might interest you.
Although Clas Ohlson isn’t currently generating the highest returns, we’ve compiled a list of companies that are currently generating over 25% return on equity. look at this free list here.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.
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