Some Investors May Be Worried About Sitowise Group Oyj's (HEL:SITOWS) Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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 investigating Sitowise Group Oyj (HEL:SITOWS), we don't think it's current trends fit the mold of a multi-bagger.

Understanding 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. The formula for this calculation on Sitowise Group Oyj is:

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

0.07 = €14m ÷ (€265m - €62m) (Based on the trailing twelve months to June 2022).

Therefore, Sitowise Group Oyj has an ROCE of 7.0%. Ultimately, that's a low return and it under-performs the Construction industry average of 9.7%.

Check out our latest analysis for Sitowise Group Oyj

Above you can see how the current ROCE for Sitowise Group 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 Sitowise Group Oyj here for free.

What The Trend Of ROCE Can Tell Us

We weren't thrilled with the trend because Sitowise Group Oyj's ROCE has reduced by 22% over the last four years, while the business employed 136% more capital. That being said, Sitowise Group Oyj raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Sitowise Group Oyj might not have received a full period of earnings contribution from it. Additionally, we found that Sitowise Group Oyj's most recent EBIT figure is around the same as the prior year, so we'd attribute the drop in ROCE mostly to the capital raise.

In Conclusion...

In summary, despite lower returns in the short term, we're encouraged to see that Sitowise Group Oyj is reinvesting for growth and has higher sales as a result. These growth trends haven't led to growth returns though, since the stock has fallen 43% over the last year. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Like most companies, Sitowise Group Oyj does come with some risks, and we've found 2 warning signs that you should be aware of.

While Sitowise 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.