Ilkka Oyj's (HEL:ILKKA2) Returns On Capital Not Reflecting Well On The Business

What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Ilkka Oyj (HEL:ILKKA2) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Ilkka Oyj is:

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

0.00074 = €115k ÷ (€175m - €19m) (Based on the trailing twelve months to September 2022).

Therefore, Ilkka Oyj has an ROCE of 0.07%. In absolute terms, that's a low return and it also under-performs the Media industry average of 7.8%.

See our latest analysis for Ilkka Oyj

Above you can see how the current ROCE for Ilkka Oyj compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Ilkka Oyj here for free.

So How Is Ilkka Oyj's ROCE Trending?

When we looked at the ROCE trend at Ilkka Oyj, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 0.07% from 0.9% 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 Ilkka Oyj's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Ilkka Oyj is reinvesting for growth and has higher sales as a result. And the stock has followed suit returning a meaningful 47% to shareholders over the last five years. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

On a separate note, we've found 4 warning signs for Ilkka Oyj you'll probably want to know about.

While Ilkka Oyj may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.