What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. Ultimately, this demonstrates that it’s a business that is reinvesting profits at increasing rates of return. With that in mind, we’ve noticed some promising trends at Piippo Oyj (HEL:PIIPPO) so let’s look a bit deeper.
Understanding 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. To calculate this metric for Piippo Oyj, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.086 = €863k ÷ (€21m – €11m) (Based on the trailing twelve months to September 2022).
Therefore, Piippo Oyj has an ROCE of 8.6%. Ultimately, that’s a low return and it under-performs the Luxury industry average of 13%.
See our latest analysis for Piippo Oyj
Historical performance is a great place to start when researching a stock so above you can see the gauge for Piippo Oyj’s ROCE against it’s prior returns. If you’re interested in investigating Piippo Oyj’s past further, check out this free graph of past earnings, revenue and cash flow.
How Are Returns Trending?
While in absolute terms it isn’t a high ROCE, it’s promising to see that it has been moving in the right direction. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 8.6%. The company is effectively making more money per dollar of capital used, and it’s worth noting that the amount of capital has increased too, by 34%. So we’re very much inspired by what we’re seeing at Piippo Oyj thanks to its ability to profitably reinvest capital.
On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. The current liabilities has increased to 52% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. Given it’s pretty high ratio, we’d remind investors that having current liabilities at those levels can bring about some risks in certain businesses.
What We Can Learn From Piippo Oyj’s ROCE
To sum it up, Piippo Oyj has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And since the stock has fallen 52% 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.
If you’d like to know about the risks facing Piippo Oyj, we’ve discovered 3 warning signs that you should be aware of.
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.
Valuation is complex, but we’re helping make it simple.
Find out whether Piippo Oyj is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.
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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.