What Should Investors Know About Pihlajalinna Oyj's (HEL:PIHLIS) Return On Capital?

By
Simply Wall St
Published
October 16, 2018

This article is intended for those of you who are at the beginning of your investing journey and want to better understand how you can grow your money by investing in Pihlajalinna Oyj (HEL:PIHLIS).

Buying Pihlajalinna 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. To understand Pihlajalinna Oyj’s capital returns we will look at a useful metric called return on capital employed. This will tell us if the company is growing your capital and placing you in good stead to sell your shares at a profit.

View our latest analysis for Pihlajalinna Oyj

Pihlajalinna Oyj's Return On Capital Employed

When you choose to invest in a company, there is an opportunity cost because that money could’ve been invested elsewhere. 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. To determine Pihlajalinna Oyj's capital return we will use ROCE, which tells us how much the company makes from the capital employed in their operations (for things like machinery, wages etc). I have calculated Pihlajalinna Oyj’s ROCE for you below:

ROCE Calculation for PIHLIS

Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)

Capital Employed = (Total Assets - Current Liabilities)

∴ ROCE = €10m ÷ (€335m - €87m) = 3.8%

As you can see, PIHLIS earned €3.8 from every €100 you invested over the previous twelve months. This shows Pihlajalinna Oyj provides an unsatisfying capital return that is well below the 15% ROCE that is typically considered to be a strong benchmark. Nevertheless, if PIHLIS is clever with their reinvestments or dividend payments, investors can still grow their capital although to a poor extent.

HLSE:PIHLIS Last Perf October 16th 18

Why is this the case?

Although Pihlajalinna Oyj is in an unfavourable position, you should know that this could change if the company is able to increase earnings on the same capital base or find new efficiencies that require less capital to produce earnings. So it is important for investors to understand what is going on under the hood and look at how these variables have been behaving. Looking three years in the past, it is evident that PIHLIS's ROCE has risen from 3.3%, indicating the company's capital returns have stengthened. Over the same period, EBT went from €4m to €10m and the amount of capital employed also grew but by a proportionally lesser volume, which suggests the larger ROCE is due to a growth in earnings relative to capital requirements.

Next Steps

ROCE for PIHLIS investors is below the desired level at the moment, however, the company has triggered an upward trend over the recent past which could signal an opportunity for a solid return on investment in the long term. It is important to know that ROCE does not dictate returns alone, so you need to consider other fundamentals in the business such as future prospects and valuation to determine if an opportunity exists that isn't made apparent by looking at past data. If you’re building your portfolio and want to take a deeper look, I’ve added a few links below that will help you further evaluate PIHLIS or move on to other alternatives.

  1. Future Outlook: What are well-informed industry analysts predicting for PIHLIS’s future growth? Take a look at our free research report of analyst consensus for PIHLIS’s outlook.
  2. Valuation: What is PIHLIS worth today? Despite the unattractive ROCE, is the outlook correctly factored in to the price? The intrinsic value infographic in our free research report helps visualize whether PIHLIS is currently undervalued by the market.
  3. 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.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.

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Simply Wall St has no position in any of the companies mentioned. This article is general in nature. 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.
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