Huhtamäki Oyj (HEL:HUH1V) Is Reinvesting At Lower Rates Of Return

There are a few key trends to look for if we want to identify the next multi-bagger. 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 Huhtamäki Oyj (HEL:HUH1V), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

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 Huhtamäki Oyj:

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

0.096 = €320m ÷ (€4.8b - €1.5b) (Based on the trailing twelve months to March 2022).

Thus, Huhtamäki Oyj has an ROCE of 9.6%. On its own, that's a low figure but it's around the 8.8% average generated by the Packaging industry.

See our latest analysis for Huhtamäki Oyj

Above you can see how the current ROCE for Huhtamäki Oyj compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Huhtamäki Oyj.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Huhtamäki Oyj doesn't inspire confidence. Over the last five years, returns on capital have decreased to 9.6% from 13% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

What We Can Learn From Huhtamäki Oyj's ROCE

While returns have fallen for Huhtamäki Oyj in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. In light of this, the stock has only gained 11% over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

On a final note, we found 2 warning signs for Huhtamäki Oyj (1 makes us a bit uncomfortable) you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.