Returns On Capital Signal Tricky Times Ahead For Lassila & Tikanoja Oyj (HEL:LAT1V)

If you're looking for a multi-bagger, there's a few things to keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Lassila & Tikanoja Oyj (HEL:LAT1V) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What is 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. To calculate this metric for Lassila & Tikanoja Oyj, this is the formula:

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

0.087 = €32m ÷ (€580m - €209m) (Based on the trailing twelve months to March 2021).

Thus, Lassila & Tikanoja Oyj has an ROCE of 8.7%. On its own that's a low return on capital but it's in line with the industry's average returns of 9.4%.

Check out our latest analysis for Lassila & Tikanoja Oyj

Above you can see how the current ROCE for Lassila & Tikanoja 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 Lassila & Tikanoja Oyj here for free.

So How Is Lassila & Tikanoja Oyj's ROCE Trending?

In terms of Lassila & Tikanoja Oyj's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 18%, but since then they've fallen to 8.7%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

In Conclusion...

To conclude, we've found that Lassila & Tikanoja Oyj is reinvesting in the business, but returns have been falling. Unsurprisingly, the stock has only gained 19% over the last five years, which potentially indicates that investors are accounting for this going forward. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

Lassila & Tikanoja Oyj does have some risks though, and we've spotted 3 warning signs for Lassila & Tikanoja Oyj that you might be interested in.

While Lassila & Tikanoja 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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