Will Reka Industrial Oyj's (HEL:REKA) Growth In ROCE Persist?

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. With that in mind, we've noticed some promising trends at Reka Industrial Oyj (HEL:REKA) so let's look a bit deeper.

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. The formula for this calculation on Reka Industrial Oyj is:

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

0.10 = €4.6m ÷ (€73m - €29m) (Based on the trailing twelve months to December 2020).

Thus, Reka Industrial Oyj has an ROCE of 10%. By itself that's a normal return on capital and it's in line with the industry's average returns of 10%.

See our latest analysis for Reka Industrial Oyj

In the above chart we have measured Reka Industrial 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 Reka Industrial Oyj here for free.

What Can We Tell From Reka Industrial Oyj's ROCE Trend?

Reka Industrial Oyj has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 10% which is a sight for sore eyes. In addition to that, Reka Industrial Oyj is employing 180% more capital than previously which is expected of a company that's trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 39%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

Our Take On Reka Industrial Oyj's ROCE

Overall, Reka Industrial Oyj gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. And a remarkable 115% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Reka Industrial Oyj can keep these trends up, it could have a bright future ahead.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Reka Industrial Oyj (of which 1 can't be ignored!) that you should know about.

While Reka Industrial 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. 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.
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