Investors Could Be Concerned With TietoEVRY Oyj's (HEL:TIETO) Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at TietoEVRY Oyj (HEL:TIETO) and its ROCE trend, we weren't exactly thrilled.

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. The formula for this calculation on TietoEVRY Oyj is:

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

0.11 = €241m ÷ (€3.5b - €1.3b) (Based on the trailing twelve months to March 2024).

So, TietoEVRY Oyj has an ROCE of 11%. That's a relatively normal return on capital, and it's around the 13% generated by the IT industry.

See our latest analysis for TietoEVRY Oyj

In the above chart we have measured TietoEVRY 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 TietoEVRY Oyj for free.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at TietoEVRY Oyj doesn't inspire confidence. Over the last five years, returns on capital have decreased to 11% from 19% five years ago. However it looks like TietoEVRY 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.

What We Can Learn From TietoEVRY Oyj's ROCE

To conclude, we've found that TietoEVRY Oyj is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 11% in the last five years. Therefore based on the analysis done in this article, we don't think TietoEVRY Oyj has the makings of a multi-bagger.

If you'd like to know more about TietoEVRY Oyj, we've spotted 2 warning signs, and 1 of them shouldn't be ignored.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com