Neste Oyj (HEL:NESTE) Has More To Do To Multiply In Value Going Forward

By
Simply Wall St
Published
November 17, 2021
HLSE:NESTE
Source: Shutterstock

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. That's why when we briefly looked at Neste Oyj's (HEL:NESTE) ROCE trend, we were pretty happy with what we saw.

Return On Capital Employed (ROCE): What is it?

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 Neste Oyj, this is the formula:

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

0.20 = €1.7b ÷ (€12b - €3.3b) (Based on the trailing twelve months to September 2021).

So, Neste Oyj has an ROCE of 20%. On its own, that's a standard return, however it's much better than the 8.0% generated by the Oil and Gas industry.

See our latest analysis for Neste Oyj

roce
HLSE:NESTE Return on Capital Employed November 18th 2021

In the above chart we have measured Neste Oyj's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Can We Tell From Neste Oyj's ROCE Trend?

While the current returns on capital are decent, they haven't changed much. Over the past five years, ROCE has remained relatively flat at around 20% and the business has deployed 66% more capital into its operations. 20% is a pretty standard return, and it provides some comfort knowing that Neste Oyj has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

The Bottom Line

The main thing to remember is that Neste Oyj has proven its ability to continually reinvest at respectable rates of return. And long term investors would be thrilled with the 312% return they've received over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

While Neste Oyj doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation on our platform.

While Neste 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.

Discounted cash flow calculation for every stock

Simply Wall St does a detailed discounted cash flow calculation every 6 hours for every stock on the market, so if you want to find the intrinsic value of any company just search here. It’s FREE.

Make Confident Investment Decisions

Simply Wall St's Editorial Team provides unbiased, factual reporting on global stocks using in-depth fundamental analysis.
Find out more about our editorial guidelines and team.