Merus Power Oyj (HEL:MERUS) May Have Issues Allocating Its Capital

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. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at Merus Power Oyj (HEL:MERUS) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Merus Power Oyj:

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

0.0068 = €106k ÷ (€25m - €9.0m) (Based on the trailing twelve months to December 2022).

Therefore, Merus Power Oyj has an ROCE of 0.7%. Ultimately, that's a low return and it under-performs the Electrical industry average of 15%.

Check out our latest analysis for Merus Power Oyj

Above you can see how the current ROCE for Merus Power 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 Merus Power Oyj.

SWOT Analysis for Merus Power Oyj

What Does the ROCE Trend For Merus Power Oyj Tell Us?

In terms of Merus Power Oyj's historical ROCE movements, the trend isn't fantastic. Over the last three years, returns on capital have decreased to 0.7% from 5.8% three years ago. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

Our Take On Merus Power Oyj's ROCE

While returns have fallen for Merus Power Oyj in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. These growth trends haven't led to growth returns though, since the stock has fallen 16% over the last year. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

Merus Power Oyj does have some risks though, and we've spotted 3 warning signs for Merus Power Oyj that you might be interested in.

While Merus Power 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.