Ponsse Oyj (HEL:PON1V) May Have Issues Allocating Its Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Ponsse Oyj (HEL:PON1V) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is 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. To calculate this metric for Ponsse Oyj, this is the formula:

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

0.18 = €68m ÷ (€578m - €199m) (Based on the trailing twelve months to September 2022).

Therefore, Ponsse Oyj has an ROCE of 18%. In absolute terms, that's a satisfactory return, but compared to the Machinery industry average of 8.1% it's much better.

Check out our latest analysis for Ponsse Oyj

Above you can see how the current ROCE for Ponsse 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 Ponsse Oyj.

What Does the ROCE Trend For Ponsse Oyj Tell Us?

On the surface, the trend of ROCE at Ponsse Oyj doesn't inspire confidence. Over the last five years, returns on capital have decreased to 18% from 31% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

The Bottom Line On Ponsse Oyj's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Ponsse Oyj. These trends are starting to be recognized by investors since the stock has delivered a 1.8% gain to shareholders who've held over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

If you'd like to know more about Ponsse Oyj, we've spotted 2 warning signs, and 1 of them is concerning.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.