We Like These Underlying Return On Capital Trends At HKScan Oyj (HEL:HKSAV)

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. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in HKScan Oyj's (HEL:HKSAV) returns on capital, so let's have a look.

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. Analysts use this formula to calculate it for HKScan Oyj:

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

0.011 = €6.4m ÷ (€994m - €414m) (Based on the trailing twelve months to June 2022).

Therefore, HKScan Oyj has an ROCE of 1.1%. In absolute terms, that's a low return and it also under-performs the Food industry average of 8.9%.

Check out the opportunities and risks within the FI Food industry.

Historical performance is a great place to start when researching a stock so above you can see the gauge for HKScan Oyj's ROCE against it's prior returns. If you're interested in investigating HKScan Oyj's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For HKScan Oyj Tell Us?

While there are companies with higher returns on capital out there, we still find the trend at HKScan Oyj promising. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 145% 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. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

On a side note, HKScan Oyj's current liabilities are still rather high at 42% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Key Takeaway

As discussed above, HKScan Oyj appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Astute investors may have an opportunity here because the stock has declined 62% in the last five years. With that in mind, we believe the promising trends warrant this stock for further investigation.

On a final note, we've found 2 warning signs for HKScan Oyj that we think you should be aware of.

While HKScan 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.

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.