Tecnotree Oyj (HEL:TEM1V) Is Achieving High Returns On Its Capital

There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. And in light of that, the trends we're seeing at Tecnotree Oyj's (HEL:TEM1V) look very promising so lets take a look.

What is Return On Capital Employed (ROCE)?

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 Tecnotree Oyj, this is the formula:

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

0.32 = €23m ÷ (€84m - €13m) (Based on the trailing twelve months to March 2022).

So, Tecnotree Oyj has an ROCE of 32%. In absolute terms that's a great return and it's even better than the Software industry average of 14%.

View our latest analysis for Tecnotree Oyj

In the above chart we have measured Tecnotree Oyj's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Does the ROCE Trend For Tecnotree Oyj Tell Us?

Tecnotree Oyj has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 32% which is a sight for sore eyes. Not only that, but the company is utilizing 73% more capital than before, but that's to be expected from a company trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

One more thing to note, Tecnotree Oyj has decreased current liabilities to 15% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

The Key Takeaway

Long story short, we're delighted to see that Tecnotree Oyj's reinvestment activities have paid off and the company is now profitable. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. Therefore, we think it would be worth your time to check if these trends are going to continue.

Tecnotree Oyj does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those shouldn't be ignored...

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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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.