Returns On Capital At Norrhydro Group Oyj (HEL:NORRH) Paint A Concerning Picture

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This indicates the company is producing less profit from its investments and its total assets are decreasing. In light of that, from a first glance at Norrhydro Group Oyj (HEL:NORRH), we've spotted some signs that it could be struggling, so let's investigate.

What Is Return On Capital Employed (ROCE)?

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 Norrhydro Group Oyj:

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

0.015 = €259k ÷ (€27m - €8.9m) (Based on the trailing twelve months to June 2023).

So, Norrhydro Group Oyj has an ROCE of 1.5%. Ultimately, that's a low return and it under-performs the Machinery industry average of 11%.

See our latest analysis for Norrhydro Group Oyj

In the above chart we have measured Norrhydro Group 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 Norrhydro Group Oyj here for free.

What The Trend Of ROCE Can Tell Us

We are a bit worried about the trend of returns on capital at Norrhydro Group Oyj. To be more specific, the ROCE was 14% one year ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Norrhydro Group Oyj becoming one if things continue as they have.

In Conclusion...

In summary, it's unfortunate that Norrhydro Group Oyj is generating lower returns from the same amount of capital. It should come as no surprise then that the stock has fallen 38% over the last year, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

One final note, you should learn about the 4 warning signs we've spotted with Norrhydro Group Oyj (including 1 which is significant) .

While Norrhydro Group 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.