We're Watching These Trends At Elecster Oyj (HEL:ELEAV)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Elecster Oyj (HEL:ELEAV), it didn't seem to tick all of these boxes.

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 Elecster Oyj:

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).

So, Elecster Oyj has an ROCE of 5.7%. Ultimately, that's a low return and it under-performs the Machinery industry average of 8.7%.

Check out our latest analysis for Elecster Oyj

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Elecster Oyj has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

On the surface, the trend of ROCE at Elecster Oyj doesn't inspire confidence. Over the last five years, returns on capital have decreased to 5.7% from 14% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

Our Take On Elecster Oyj's ROCE

Bringing it all together, while we're somewhat encouraged by Elecster Oyj's reinvestment in its own business, we're aware that returns are shrinking. And with the stock having returned a mere 35% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

One final note, you should learn about the 6 warning signs we've spotted with Elecster Oyj (including 1 which is can't be ignored) .

While Elecster Oyj 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.

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