Investors Could Be Concerned With Lemonsoft Oyj's (HEL:LEMON) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at Lemonsoft Oyj (HEL:LEMON) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Lemonsoft Oyj:

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

0.18 = €6.5m ÷ (€48m - €12m) (Based on the trailing twelve months to September 2023).

Therefore, Lemonsoft Oyj has an ROCE of 18%. That's a pretty standard return and it's in line with the industry average of 18%.

View our latest analysis for Lemonsoft Oyj

In the above chart we have measured Lemonsoft 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 Lemonsoft Oyj here for free.

So How Is Lemonsoft Oyj's ROCE Trending?

In terms of Lemonsoft Oyj's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 51%, but since then they've fallen to 18%. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Bottom Line On Lemonsoft Oyj's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Lemonsoft Oyj is reinvesting for growth and has higher sales as a result. These growth trends haven't led to growth returns though, since the stock has fallen 50% over the last year. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

One more thing, we've spotted 4 warning signs facing Lemonsoft Oyj that you might find interesting.

While Lemonsoft 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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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.