Vincit Oyj's (HEL:VINCIT) Returns On Capital Not Reflecting Well On The Business

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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 Vincit Oyj (HEL:VINCIT) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. Analysts use this formula to calculate it for Vincit Oyj:

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

0.18 = €5.1m ÷ (€39m - €12m) (Based on the trailing twelve months to December 2021).

So, Vincit Oyj has an ROCE of 18%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Software industry average of 16%.

See our latest analysis for Vincit Oyj

Historical performance is a great place to start when researching a stock so above you can see the gauge for Vincit Oyj's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Vincit Oyj, check out these free graphs here.

How Are Returns Trending?

In terms of Vincit Oyj's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 18% from 36% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

In Conclusion...

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Vincit Oyj. These growth trends haven't led to growth returns though, since the stock has fallen 16% over the last five years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

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

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.