Be Wary Of Keskisuomalainen Oyj (HEL:KSLAV) And Its Returns On Capital

When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. And from a first read, things don't look too good at Keskisuomalainen Oyj (HEL:KSLAV), so let's see why.

What Is 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. The formula for this calculation on Keskisuomalainen Oyj is:

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

0.02 = €2.7m ÷ (€196m - €57m) (Based on the trailing twelve months to December 2022).

Thus, Keskisuomalainen Oyj has an ROCE of 2.0%. Ultimately, that's a low return and it under-performs the Media industry average of 5.8%.

View our latest analysis for Keskisuomalainen Oyj

Historical performance is a great place to start when researching a stock so above you can see the gauge for Keskisuomalainen Oyj's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Keskisuomalainen Oyj, check out these free graphs here.

SWOT Analysis for Keskisuomalainen Oyj

So How Is Keskisuomalainen Oyj's ROCE Trending?

We are a bit worried about the trend of returns on capital at Keskisuomalainen Oyj. About five years ago, returns on capital were 9.8%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. If these trends continue, we wouldn't expect Keskisuomalainen Oyj to turn into a multi-bagger.

In Conclusion...

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. Despite the concerning underlying trends, the stock has actually gained 35% over the last five years, so it might be that the investors are expecting the trends to reverse. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

One final note, you should learn about the 3 warning signs we've spotted with Keskisuomalainen Oyj (including 1 which is potentially serious) .

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.