Merus Power Oyj (HEL:MERUS) Shareholders Will Want The ROCE Trajectory To Continue

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at Merus Power Oyj (HEL:MERUS) and its trend of ROCE, we really liked what we saw.

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. The formula for this calculation on Merus Power Oyj is:

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

0.035 = €498k ÷ (€18m - €3.6m) (Based on the trailing twelve months to June 2022).

Therefore, Merus Power Oyj has an ROCE of 3.5%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 12%.

Check out our latest analysis for Merus Power Oyj

In the above chart we have measured Merus Power 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 Merus Power Oyj here for free.

What The Trend Of ROCE Can Tell Us

We're delighted to see that Merus Power 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 3.5% on its capital. And unsurprisingly, like most companies trying to break into the black, Merus Power Oyj is utilizing 223% more capital than it was two years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

In Conclusion...

To the delight of most shareholders, Merus Power Oyj has now broken into profitability. And since the stock has fallen 31% over the last year, there might be an opportunity here. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

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 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.