Aallon Group Oyj (HEL:AALLON) Might Have The Makings Of A Multi-Bagger

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Aallon Group Oyj (HEL:AALLON) and its trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Aallon Group Oyj, this is the formula:

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

0.17 = €2.2m ÷ (€20m - €7.1m) (Based on the trailing twelve months to June 2022).

Thus, Aallon Group Oyj has an ROCE of 17%. In absolute terms, that's a satisfactory return, but compared to the Professional Services industry average of 14% it's much better.

Check out the opportunities and risks within the FI Professional Services industry.

In the above chart we have measured Aallon Group 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 Aallon Group Oyj here for free.

So How Is Aallon Group Oyj's ROCE Trending?

Investors would be pleased with what's happening at Aallon Group Oyj. The data shows that returns on capital have increased substantially over the last three years to 17%. Basically the business is earning more per dollar of capital invested and in addition to that, 183% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

The Bottom Line

To sum it up, Aallon Group Oyj has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Considering the stock has delivered 9.1% to its stockholders over the last three years, it may be fair to think that investors aren't fully aware of the promising trends yet. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

One more thing to note, we've identified 2 warning signs with Aallon Group Oyj and understanding these should be part of your investment process.

While Aallon Group Oyj isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.