Investors Could Be Concerned With Enento Group Oyj's (HEL:ENENTO) Returns On Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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. However, after investigating Enento Group Oyj (HEL:ENENTO), we don't think it's current trends fit the mold of a multi-bagger.

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

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 Enento Group Oyj is:

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

0.068 = €32m ÷ (€499m - €35m) (Based on the trailing twelve months to March 2023).

Thus, Enento Group Oyj has an ROCE of 6.8%. In absolute terms, that's a low return and it also under-performs the Professional Services industry average of 11%.

See our latest analysis for Enento Group Oyj

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

So How Is Enento Group Oyj's ROCE Trending?

On the surface, the trend of ROCE at Enento Group Oyj doesn't inspire confidence. Around five years ago the returns on capital were 14%, but since then they've fallen to 6.8%. However it looks like Enento Group Oyj might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

Our Take On Enento Group Oyj's ROCE

Bringing it all together, while we're somewhat encouraged by Enento Group Oyj's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 30% over the last five years, investors may not be too optimistic on this trend improving either. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

If you'd like to know about the risks facing Enento Group Oyj, we've discovered 4 warning signs that you should be aware of.

While Enento 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.