Some Investors May Be Worried About Nokian Renkaat Oyj's (HEL:TYRES) Returns On Capital

By
Simply Wall St
Published
September 23, 2021
HLSE:TYRES
Source: Shutterstock

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. However, after investigating Nokian Renkaat Oyj (HEL:TYRES), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Nokian Renkaat Oyj:

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

0.16 = €284m ÷ (€2.3b - €495m) (Based on the trailing twelve months to June 2021).

So, Nokian Renkaat Oyj has an ROCE of 16%. On its own, that's a standard return, however it's much better than the 9.4% generated by the Auto Components industry.

See our latest analysis for Nokian Renkaat Oyj

roce
HLSE:TYRES Return on Capital Employed September 24th 2021

Above you can see how the current ROCE for Nokian Renkaat Oyj compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Nokian Renkaat Oyj.

What Can We Tell From Nokian Renkaat Oyj's ROCE Trend?

In terms of Nokian Renkaat Oyj's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 21%, but since then they've fallen to 16%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

What We Can Learn From Nokian Renkaat Oyj's ROCE

While returns have fallen for Nokian Renkaat Oyj in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. These trends are starting to be recognized by investors since the stock has delivered a 21% gain to shareholders who've held over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

If you'd like to know about the risks facing Nokian Renkaat Oyj, we've discovered 1 warning sign that you should be aware of.

While Nokian Renkaat Oyj isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.
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