I am writing today to help inform people who are new to the stock market and looking to gauge the potential return on investment in Olvi Oyj (HEL:OLVAS).
Buying Olvi Oyj makes you a partial owner of the company. Your equity share is granted in return for the capital provided to the business to operate, and in order for an investment to be successful the business has to create earnings from the funds that make up this capital. This is because the actual cash flow generated by the business dictates the potential for income (dividends) and capital appreciation (price increases), which are the two ways to achieve positive returns when buying a stock. Therefore, looking at how efficiently Olvi Oyj is able to use capital to create earnings will help us understand your potential return. Investors use many different metrics but the analysis below focuses on return on capital employed (ROCE). Let’s take a look at what it can tell us.
What is Return on Capital Employed (ROCE)?
You only have a finite amount of capital to invest, so there are only so many companies that you can add to your portfolio. Therefore all else aside, your investment in a certain company represents a vote of confidence that the money used to buy the stock will grow larger than if invested elsewhere. So the business’ ability to grow the size of your capital is very important and can be assessed by comparing the return on capital you can get on your investment with a hurdle rate that depends on the other return possibilities you can identify. We’ll look at Olvi Oyj’s returns by computing return on capital employed, which will tell us what the company can generate from the money spent in operations. I have calculated Olvi Oyj’s ROCE for you below:
ROCE Calculation for OLVAS
Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)
Capital Employed = (Total Assets – Current Liabilities)
∴ ROCE = €42.06m ÷ (€334.98m – €104.18m) = 18.22%
The calculation above shows that OLVAS’s earnings were 18.22% of capital employed. A good ROCE hurdle you should aim for in your investments is 15%, which is exceeded by OLVAS and means the company creates a solid amount of earnings on capital employed. If this can be sustained with good reinvestment opportunities or dividend distributions your capital has the potential to compound over time.
A deeper look
Although Olvi Oyj is in a favourable position, you should know that this could change if the company is unable to maintain a strong ROCE above the benchmark, which will depend on the behaviour of the underlying variables (EBT and capital employed). So it is important for investors to understand what is going on under the hood and look at how these variables have been behaving. Three years ago, OLVAS’s ROCE was 15.72%, which means the company’s capital returns have improved. We can see that earnings have increased from €36.38m to €42.06m whilst the amount of capital employed has declined as a result of an increase in the use of current liabilities (use of borrowed money to create earnings) , which means the company has been able to improve ROCE by growing earnings and simultaneously putting less capital to work.
ROCE for OLVAS investors has grown in the last few years and is currently at a level that makes the company an attractive candidate that is capable of producing solid capital returns, and hence, an attractive return on investment. This makes the company an attractive place to put your money, but ROCE does not tell the whole picture so you need to pay attention to other fundamentals like future prospects and valuation. It’s important to account for these factors because you cannot be sure if this trend will continue or if you are getting a good deal for the future returns you are paying for. Olvi Oyj’s fundamentals can be explored with the links I’ve provided below if you are interested, otherwise you can start looking at other high-performing stocks.
- Future Outlook: What are well-informed industry analysts predicting for OLVAS’s future growth? Take a look at our free research report of analyst consensus for OLVAS’s outlook.
- Valuation: What is OLVAS worth today? Is the stock undervalued, even if its ROCE is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether OLVAS is currently mispriced by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.