Investors Could Be Concerned With Metsä Board Oyj's (HEL:METSB) 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. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at Metsä Board Oyj (HEL:METSB) and its ROCE trend, we weren't exactly thrilled.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Metsä Board Oyj:

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

0.011 = €27m ÷ (€3.0b - €525m) (Based on the trailing twelve months to March 2024).

So, Metsä Board Oyj has an ROCE of 1.1%. In absolute terms, that's a low return and it also under-performs the Packaging industry average of 11%.

See our latest analysis for Metsä Board Oyj

Above you can see how the current ROCE for Metsä Board Oyj compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Metsä Board Oyj .

What Can We Tell From Metsä Board Oyj's ROCE Trend?

In terms of Metsä Board Oyj's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 7.0%, but since then they've fallen to 1.1%. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

Our Take On Metsä Board Oyj's ROCE

We're a bit apprehensive about Metsä Board Oyj because despite more capital being deployed in the business, returns on that capital and sales have both fallen. However the stock has delivered a 94% return to shareholders over the last five years, so investors might be expecting the trends to turn around. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

If you want to know some of the risks facing Metsä Board Oyj we've found 3 warning signs (1 is potentially serious!) that you should be aware of before investing here.

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.

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