The Trend Of High Returns At Metso Oyj (HEL:METSO) Has Us Very Interested

If you're looking for a multi-bagger, there's a few things to 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. And in light of that, the trends we're seeing at Metso Oyj's (HEL:METSO) look very promising so lets take a look.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Metso Oyj:

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

0.23 = €851m ÷ (€6.9b - €3.2b) (Based on the trailing twelve months to June 2023).

So, Metso Oyj has an ROCE of 23%. In absolute terms that's a great return and it's even better than the Machinery industry average of 13%.

Check out our latest analysis for Metso Oyj

Above you can see how the current ROCE for Metso Oyj compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Metso Oyj here for free.

What The Trend Of ROCE Can Tell Us

Metso Oyj is displaying some positive trends. The data shows that returns on capital have increased substantially over the last four years to 23%. The amount of capital employed has increased too, by 88%. So we're very much inspired by what we're seeing at Metso Oyj thanks to its ability to profitably reinvest capital.

On a separate but related note, it's important to know that Metso Oyj has a current liabilities to total assets ratio of 47%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line On Metso Oyj's ROCE

To sum it up, Metso Oyj has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 74% return over the last three years. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

Metso Oyj does have some risks though, and we've spotted 1 warning sign for Metso Oyj that you might be interested in.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning 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.