Be Wary Of Robit Oyj (HEL:ROBIT) And Its Returns On Capital

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. So after we looked into Robit Oyj (HEL:ROBIT), the trends above didn't look too great.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Robit Oyj:

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

0.029 = €2.3m ÷ (€108m - €27m) (Based on the trailing twelve months to June 2021).

Thus, Robit Oyj has an ROCE of 2.9%. Ultimately, that's a low return and it under-performs the Machinery industry average of 11%.

View our latest analysis for Robit Oyj

In the above chart we have measured Robit 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 Robit Oyj.

So How Is Robit Oyj's ROCE Trending?

In terms of Robit Oyj's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 3.8%, however they're now substantially lower than that as we saw above. 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. If these trends continue, we wouldn't expect Robit Oyj to turn into a multi-bagger.

The Key Takeaway

In summary, it's unfortunate that Robit Oyj is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 29% from where it was five years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Robit Oyj does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is a bit concerning...

While Robit 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.

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.

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