Returns On Capital Are Showing Encouraging Signs At Merus Power Oyj (HEL:MERUS)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at Merus Power Oyj (HEL:MERUS) and its trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What Is It?

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 Merus Power Oyj:

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).

So, 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 13%.

See 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 to see what analysts are forecasting going forward, you should check out our free report for Merus Power Oyj.

So How Is Merus Power Oyj's ROCE Trending?

Merus Power Oyj has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses two years ago, but now it's earning 3.5% which is a sight for sore eyes. In addition to that, Merus Power Oyj is employing 224% more capital than previously which is expected of a company that's trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

The Bottom Line On Merus Power Oyj's ROCE

To the delight of most shareholders, Merus Power Oyj has now broken into profitability. And since the stock has fallen 42% 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.

Like most companies, Merus Power Oyj does come with some risks, and we've found 1 warning sign that you should be aware of.

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.

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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.