To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we’d want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Schweitzer-Mauduit International (NYSE:SWM) and its ROCE trend, we weren’t exactly thrilled.
Understanding Return On Capital Employed (ROCE)
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 Schweitzer-Mauduit International:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.10 = US$144m ÷ (US$1.6b – US$158m) (Based on the trailing twelve months to March 2021).
Thus, Schweitzer-Mauduit International has an ROCE of 10%. That’s a pretty standard return and it’s in line with the industry average of 10%.
In the above chart we have measured Schweitzer-Mauduit International’s prior ROCE against its prior performance, but the future is arguably more important. If you’re interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
How Are Returns Trending?
Over the past five years, Schweitzer-Mauduit International’s ROCE and capital employed have both remained mostly flat. Businesses with these traits tend to be mature and steady operations because they’re past the growth phase. So don’t be surprised if Schweitzer-Mauduit International doesn’t end up being a multi-bagger in a few years time.
The Key Takeaway
In a nutshell, Schweitzer-Mauduit International has been trudging along with the same returns from the same amount of capital over the last five years. And investors may be recognizing these trends since the stock has only returned a total of 31% to shareholders over the last five years. So if you’re looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.
On a final note, we’ve found 2 warning signs for Schweitzer-Mauduit International that we think you should be aware of.
While Schweitzer-Mauduit International may not currently earn the highest returns, we’ve compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
This article by Simply Wall St is general in nature. 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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