There Are Reasons To Feel Uneasy About Pihlajalinna Oyj's (HEL:PIHLIS) 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'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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 Pihlajalinna Oyj (HEL:PIHLIS), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Pihlajalinna Oyj:

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

0.041 = €20m ÷ (€651m - €166m) (Based on the trailing twelve months to March 2024).

Thus, Pihlajalinna Oyj has an ROCE of 4.1%. Ultimately, that's a low return and it under-performs the Healthcare industry average of 7.3%.

View our latest analysis for Pihlajalinna Oyj

In the above chart we have measured Pihlajalinna Oyj's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Pihlajalinna Oyj .

So How Is Pihlajalinna Oyj's ROCE Trending?

In terms of Pihlajalinna Oyj's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 5.3% over the last five years. 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's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Bottom Line

To conclude, we've found that Pihlajalinna Oyj is reinvesting in the business, but returns have been falling. Since the stock has declined 18% over the last five years, investors may not be too optimistic on this trend improving either. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

Pihlajalinna Oyj does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is significant...

While Pihlajalinna 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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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.