Returns On Capital Are Showing Encouraging Signs At Wulff-Yhtiöt Oyj (HEL:WUF1V)

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. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. With that in mind, we've noticed some promising trends at Wulff-Yhtiöt Oyj (HEL:WUF1V) so let's look a bit deeper.

What Is 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 Wulff-Yhtiöt Oyj, this is the formula:

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

0.11 = €3.3m ÷ (€52m - €22m) (Based on the trailing twelve months to September 2023).

Therefore, Wulff-Yhtiöt Oyj has an ROCE of 11%. In isolation, that's a pretty standard return but against the Retail Distributors industry average of 14%, it's not as good.

Check out our latest analysis for Wulff-Yhtiöt Oyj

In the above chart we have measured Wulff-Yhtiöt 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 Wulff-Yhtiöt Oyj here for free.

So How Is Wulff-Yhtiöt Oyj's ROCE Trending?

The trends we've noticed at Wulff-Yhtiöt Oyj are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 11%. Basically the business is earning more per dollar of capital invested and in addition to that, 116% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

Another thing to note, Wulff-Yhtiöt Oyj has a high ratio of current liabilities to total assets of 42%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

What We Can Learn From Wulff-Yhtiöt Oyj's ROCE

All in all, it's terrific to see that Wulff-Yhtiöt Oyj is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a solid 71% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

If you want to know some of the risks facing Wulff-Yhtiöt Oyj we've found 4 warning signs (1 is potentially serious!) that you should be aware of before investing here.

While Wulff-Yhtiöt 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.

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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.