Returns On Capital Are Showing Encouraging Signs At Wärtsilä Oyj Abp (HEL:WRT1V)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at Wärtsilä Oyj Abp (HEL:WRT1V) so let's look a bit deeper.

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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 Wärtsilä Oyj Abp is:

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

0.19 = €675m ÷ (€7.7b - €4.1b) (Based on the trailing twelve months to December 2024).

Therefore, Wärtsilä Oyj Abp has an ROCE of 19%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Machinery industry average of 17%.

See our latest analysis for Wärtsilä Oyj Abp

Above you can see how the current ROCE for Wärtsilä Oyj Abp 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 analyst report for Wärtsilä Oyj Abp .

So How Is Wärtsilä Oyj Abp's ROCE Trending?

Wärtsilä Oyj Abp is showing promise given that its ROCE is trending up and to the right. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 97% in that same time. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 54% of its operations, which isn't ideal. And with current liabilities at those levels, that's pretty high.

Our Take On Wärtsilä Oyj Abp's ROCE

As discussed above, Wärtsilä Oyj Abp appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Since the stock has returned a staggering 180% to shareholders over the last five years, it looks like investors are recognizing these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

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While Wärtsilä Oyj Abp 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.