If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. Although, when we looked at Vincit Oyj (HEL:VINCIT), it didn't seem to tick all of these boxes.
Return On Capital Employed (ROCE): What is it?
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. The formula for this calculation on Vincit Oyj is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.13 = €3.1m ÷ (€36m - €12m) (Based on the trailing twelve months to June 2020).
Therefore, Vincit Oyj has an ROCE of 13%. That's a pretty standard return and it's in line with the industry average of 13%.
View our latest analysis for Vincit Oyj
Above you can see how the current ROCE for Vincit Oyj compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What Can We Tell From Vincit Oyj's ROCE Trend?
In terms of Vincit Oyj's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 39% over the last five years. 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. If these investments prove successful, this can bode very well for long term stock performance.
The Key Takeaway
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. In light of this, the stock has only gained 7.8% over the last three years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.
One more thing, we've spotted 1 warning sign 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. 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.
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About HLSE:VINCIT
Vincit Oyj
Provides service design and software development services in Finland, Poland, Portugal, Sweden, and the United States.
Undervalued with excellent balance sheet.
