Duell Oyj (HEL:DUELL) Could Be Struggling To Allocate Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Duell Oyj (HEL:DUELL) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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 Duell Oyj is:

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

0.04 = €3.2m ÷ (€116m - €37m) (Based on the trailing twelve months to February 2023).

Therefore, Duell Oyj has an ROCE of 4.0%. In absolute terms, that's a low return and it also under-performs the Retail Distributors industry average of 13%.

Check out our latest analysis for Duell Oyj

In the above chart we have measured Duell Oyj's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Duell Oyj here for free.

SWOT Analysis for Duell Oyj

What Can We Tell From Duell Oyj's ROCE Trend?

On the surface, the trend of ROCE at Duell Oyj doesn't inspire confidence. Over the last four years, returns on capital have decreased to 4.0% from 6.6% four years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, Duell Oyj's current liabilities have increased over the last four years to 32% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

Our Take On Duell Oyj's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Duell Oyj is reinvesting for growth and has higher sales as a result. However, despite the promising trends, the stock has fallen 57% over the last year, so there might be an opportunity here for astute investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 5 warning signs for Duell Oyj (of which 2 can't be ignored!) that you should know about.

While Duell Oyj isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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.