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Why You Should Care About PunaMusta Media Oyj’s (HEL:PUMU) Low Return On Capital

Simply Wall St

Today we are going to look at PunaMusta Media Oyj (HEL:PUMU) to see whether it might be an attractive investment prospect. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.

First, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.

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

ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Generally speaking a higher ROCE is better. Ultimately, it is a useful but imperfect metric. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.

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 PunaMusta Media Oyj:

0.001 = €74k ÷ (€109m - €35m) (Based on the trailing twelve months to December 2019.)

So, PunaMusta Media Oyj has an ROCE of 0.1%.

Check out our latest analysis for PunaMusta Media Oyj

Does PunaMusta Media Oyj Have A Good ROCE?

One way to assess ROCE is to compare similar companies. In this analysis, PunaMusta Media Oyj's ROCE appears meaningfully below the 10% average reported by the Media industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Independently of how PunaMusta Media Oyj compares to its industry, its ROCE in absolute terms is low; especially compared to the ~-0.1% available in government bonds. There are potentially more appealing investments elsewhere.

PunaMusta Media Oyj's current ROCE of 0.1% is lower than its ROCE in the past, which was 3.5%, 3 years ago. Therefore we wonder if the company is facing new headwinds. You can see in the image below how PunaMusta Media Oyj's ROCE compares to its industry. Click to see more on past growth.

HLSE:PUMU Past Revenue and Net Income April 26th 2020

When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. 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. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.

PunaMusta Media Oyj's Current Liabilities And Their Impact On Its ROCE

Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

PunaMusta Media Oyj has current liabilities of €35m and total assets of €109m. Therefore its current liabilities are equivalent to approximately 33% of its total assets. With a medium level of current liabilities boosting the ROCE a little, PunaMusta Media Oyj's low ROCE is unappealing.

Our Take On PunaMusta Media Oyj's ROCE

There are likely better investments out there. Of course, you might also be able to find a better stock than PunaMusta Media Oyj. So you may wish to see this free collection of other companies that have grown earnings strongly.

If you are like me, then you will not want to miss this free list of growing companies that insiders are 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.