What underlying trends should we be looking for in businesses to find long stocks? In a perfect world, we’d like to see a company put more capital into its business, and ideally the return on that capital also increases. If you see this, it usually means it’s a company with a great business model and plenty of lucrative reinvestment opportunities.However, after simply looking at the numbers, we don’t think so Detection technology Oyj (HEL:DETEC) has the makings of a future multi-wrapper, but let’s see why.
What is Return on Capital Employed (ROCE)?
Just to clarify if you’re not sure, ROCE is a measure of how much pre-tax income (as a percentage) a company earns from the capital invested in its business. The analyst calculates it for the detection technique Oyj using this formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.12 = EUR 8.6 million ÷ (EUR 90 million – EUR 18 million) (Based on the past 12 months ending June 2022).
therefore, The ROCE of Detection Technology Oyj is 12%. Individually, that’s a pretty standard rate of return, but it doesn’t compare to the electronics industry average of 18%.
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In the graph above, we measured Detection Technology Oyj’s previous ROCE versus its previous performance, but arguably the future is more important.If you’re interested, you can check out our analyst forecasts free Report analysts’ forecasts for the company.
What does the ROCE trend of detection technology Oyj tell us?
As far as the historical ROCE movement of detection technology Oyj is concerned, the trend is not ideal. More specifically, ROCE declined from 51% over the past five years. However, the business is currently looking for growth due to short-term returns, given both the capital used and the income. If the increased capital generates additional returns, the business and even shareholders will benefit in the long run.
On the other hand, Detection Technology Oyj has done a good job of reducing its current liabilities to 20% of total assets. Therefore, we can relate some of this to the decline in ROCE. In practical terms, this means that their suppliers or short-term creditors are funding the business less, reducing some of the risk factors. Some will claim that this makes the business less efficient at generating ROCE as it now uses its own money to fund more operations.
Although the return on capital has decreased in the short term, we have seen an increase in both revenue and capital employed by Detection Technology Oyj. However, total shareholder returns have been flat over the past five years, a possible sign that these growth trends may not have been factored in by investors. Therefore, we recommend further research on this stock to discover what other fundamentals of the business can show us.
Like most companies, Detection Technology Oyj does have some risks and we found that 1 warning sign You should know.
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This article by Simply Wall St is general in nature. We provide commentary based solely on historical data and analyst forecasts using an unbiased methodology and our articles are not intended to provide financial advice. It does not constitute advice to buy or sell any stock and does not take into account your objectives or your financial situation. Our goal is to bring you long-term focused analytics driven by fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Wall Street has no positions in any of the stocks mentioned.