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Are Marimekko Oyj’s (HEL:MMO1V) High Returns Really That Great?

Simply Wall St

Today we are going to look at Marimekko Oyj (HEL:MMO1V) to see whether it might be an attractive investment prospect. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.

Firstly, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.

Return On Capital Employed (ROCE): What is it?

ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. In general, businesses with a higher ROCE are usually better quality. Ultimately, it is a useful but imperfect metric. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that 'one dollar invested in the company generates value of more than one dollar'.

How Do You Calculate Return On Capital Employed?

The formula for calculating the return on capital employed is:

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

Or for Marimekko Oyj:

0.15 = €9.6m ÷ (€92m - €30m) (Based on the trailing twelve months to September 2019.)

So, Marimekko Oyj has an ROCE of 15%.

View our latest analysis for Marimekko Oyj

Does Marimekko Oyj Have A Good ROCE?

ROCE can be useful when making comparisons, such as between similar companies. Using our data, we find that Marimekko Oyj's ROCE is meaningfully better than the 9.0% average in the Luxury industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Independently of how Marimekko Oyj compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.

You can see in the image below how Marimekko Oyj's ROCE compares to its industry. Click to see more on past growth.

HLSE:MMO1V Past Revenue and Net Income, January 21st 2020

When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. ROCE is only a point-in-time measure. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Marimekko Oyj.

What Are Current Liabilities, And How Do They Affect Marimekko Oyj's ROCE?

Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they need to be paid within 12 months. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To counteract this, we check if a company has high current liabilities, relative to its total assets.

Marimekko Oyj has total liabilities of €30m and total assets of €92m. Therefore its current liabilities are equivalent to approximately 32% of its total assets. Marimekko Oyj has a medium level of current liabilities, which would boost the ROCE.

Our Take On Marimekko Oyj's ROCE

Marimekko Oyj's ROCE does look good, but the level of current liabilities also contribute to that. Marimekko Oyj looks strong on this analysis, but there are plenty of other companies that could be a good opportunity . Here is a free list of companies growing earnings rapidly.

I will like Marimekko Oyj better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.