Returns On Capital Are Showing Encouraging Signs At Solteq Oyj (HEL:SOLTEQ)

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. 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 Solteq Oyj (HEL:SOLTEQ) so let's look a bit deeper.

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. To calculate this metric for Solteq Oyj, this is the formula:

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

0.085 = €4.4m ÷ (€69m - €17m) (Based on the trailing twelve months to June 2023).

So, Solteq Oyj has an ROCE of 8.5%. In absolute terms, that's a low return and it also under-performs the Software industry average of 18%.

See our latest analysis for Solteq Oyj

Above you can see how the current ROCE for Solteq Oyj compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Solteq Oyj here for free.

What The Trend Of ROCE Can Tell Us

Solteq Oyj has not disappointed with their ROCE growth. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 212% in that same time. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

The Bottom Line On Solteq Oyj's ROCE

In summary, we're delighted to see that Solteq Oyj has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And since the stock has fallen 32% over the last five years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.

One more thing: We've identified 2 warning signs with Solteq Oyj (at least 1 which doesn't sit too well with us) , and understanding these would certainly be useful.

While Solteq 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.