We Like These Underlying Return On Capital Trends At Kempower Oyj (HEL:KEMPOWR)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, Kempower Oyj (HEL:KEMPOWR) looks quite promising in regards to its trends of return on capital.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Kempower Oyj:

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

0.016 = €1.8m ÷ (€133m - €22m) (Based on the trailing twelve months to June 2022).

Therefore, Kempower Oyj has an ROCE of 1.6%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 12%.

See our latest analysis for Kempower Oyj

In the above chart we have measured Kempower Oyj's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Kempower Oyj here for free.

What The Trend Of ROCE Can Tell Us

We're delighted to see that Kempower Oyj is reaping rewards from its investments and is now generating some pre-tax profits. Shareholders would no doubt be pleased with this because the business was loss-making two years ago but is is now generating 1.6% on its capital. In addition to that, Kempower Oyj is employing 4,837% more capital than previously which is expected of a company that's trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

One more thing to note, Kempower Oyj has decreased current liabilities to 16% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

What We Can Learn From Kempower Oyj's ROCE

Overall, Kempower Oyj gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. And a remarkable 188% total return over the last year tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Kempower Oyj can keep these trends up, it could have a bright future ahead.

If you want to continue researching Kempower Oyj, you might be interested to know about the 1 warning sign that our analysis has discovered.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.