Capital Allocation Trends At Elecster Oyj (HEL:ELEAV) Aren't Ideal

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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 briefly looking over the numbers, we don't think Elecster Oyj (HEL:ELEAV) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. To calculate this metric for Elecster Oyj, this is the formula:

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

0.057 = €2.2m ÷ (€50m - €11m) (Based on the trailing twelve months to December 2019).

Thus, Elecster Oyj has an ROCE of 5.7%. Ultimately, that's a low return and it under-performs the Machinery industry average of 8.8%.

Check out our latest analysis for Elecster Oyj

Historical performance is a great place to start when researching a stock so above you can see the gauge for Elecster Oyj's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Elecster Oyj, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Elecster Oyj, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 5.7% from 14% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

In Conclusion...

In summary, Elecster Oyj is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors may be recognizing these trends since the stock has only returned a total of 25% to shareholders over the last five years. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

One more thing: We've identified 6 warning signs with Elecster Oyj (at least 2 which are potentially serious) , and understanding them would certainly be useful.

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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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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