Capital Allocation Trends At F-Secure Oyj (HEL:FSC1V) Aren't Ideal

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. Although, when we looked at F-Secure Oyj (HEL:FSC1V), it didn't seem to tick all of these boxes.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for F-Secure Oyj, this is the formula:

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

0.15 = €20m ÷ (€238m - €105m) (Based on the trailing twelve months to December 2020).

Therefore, F-Secure Oyj has an ROCE of 15%. In absolute terms, that's a satisfactory return, but compared to the Software industry average of 12% it's much better.

Check out our latest analysis for F-Secure Oyj

In the above chart we have measured F-Secure 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 F-Secure Oyj here for free.

So How Is F-Secure Oyj's ROCE Trending?

On the surface, the trend of ROCE at F-Secure Oyj doesn't inspire confidence. Over the last five years, returns on capital have decreased to 15% from 22% five years ago. However it looks like F-Secure Oyj might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

On a separate but related note, it's important to know that F-Secure Oyj has a current liabilities to total assets ratio of 44%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line

Bringing it all together, while we're somewhat encouraged by F-Secure Oyj's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has gained an impressive 61% over the last five years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

F-Secure Oyj could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation on our platform quite valuable.

While F-Secure 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.

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