Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at AS Harju Elekter (TAL:HAE1T) and its ROCE trend, we weren't exactly thrilled.
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. The formula for this calculation on AS Harju Elekter is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.039 = €3.7m ÷ (€139m - €44m) (Based on the trailing twelve months to September 2021).
Therefore, AS Harju Elekter has an ROCE of 3.9%. Ultimately, that's a low return and it under-performs the Electrical industry average of 12%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for AS Harju Elekter's ROCE against it's prior returns. If you'd like to look at how AS Harju Elekter has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
What Can We Tell From AS Harju Elekter's ROCE Trend?
In terms of AS Harju Elekter's historical ROCE trend, it doesn't exactly demand attention. The company has employed 51% more capital in the last five years, and the returns on that capital have remained stable at 3.9%. 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.
On another note, while the change in ROCE trend might not scream for attention, it's interesting that the current liabilities have actually gone up over the last five years. This is intriguing because if current liabilities hadn't increased to 32% of total assets, this reported ROCE would probably be less than3.9% because total capital employed would be higher.The 3.9% ROCE could be even lower if current liabilities weren't 32% of total assets, because the the formula would show a larger base of total capital employed. So while current liabilities isn't high right now, keep an eye out in case it increases further, because this can introduce some elements of risk.
The Bottom Line
In summary, AS Harju Elekter has simply been reinvesting capital and generating the same low rate of return as before. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 136% gain to shareholders who have held over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.
AS Harju Elekter does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is a bit concerning...
While AS Harju Elekter isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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.