Investors Could Be Concerned With Remedy Entertainment Oyj's (HEL:REMEDY) Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Remedy Entertainment Oyj (HEL:REMEDY), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Remedy Entertainment Oyj, this is the formula:

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

0.17 = €13m ÷ (€89m - €9.8m) (Based on the trailing twelve months to June 2021).

Thus, Remedy Entertainment Oyj has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 13% generated by the Entertainment industry.

See our latest analysis for Remedy Entertainment Oyj

In the above chart we have measured Remedy Entertainment Oyj's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Remedy Entertainment Oyj.

How Are Returns Trending?

On the surface, the trend of ROCE at Remedy Entertainment Oyj doesn't inspire confidence. Around five years ago the returns on capital were 35%, but since then they've fallen to 17%. 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.

On a related note, Remedy Entertainment Oyj has decreased its current liabilities to 11% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

What We Can Learn From Remedy Entertainment Oyj's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Remedy Entertainment Oyj is reinvesting for growth and has higher sales as a result. And the stock has done incredibly well with a 500% return over the last three years, so long term investors are no doubt ecstatic with that result. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

Remedy Entertainment Oyj does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those can't be ignored...

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.