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Why We Like Elisa Oyj’s (HEL:ELISA) 18% Return On Capital Employed

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Simply Wall St
·4 min read
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Today we are going to look at Elisa Oyj (HEL:ELISA) 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.

First up, we'll look at what ROCE is and how we calculate it. Next, we'll compare it to others in its industry. Last but not least, we'll look at what impact its current liabilities have on its ROCE.

Understanding Return On Capital Employed (ROCE)

ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. All else being equal, a better business will have a higher ROCE. 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?

Analysts use this formula to calculate return on capital employed:

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

Or for Elisa Oyj:

0.18 = €406m ÷ (€2.9b - €682m) (Based on the trailing twelve months to March 2020.)

Therefore, Elisa Oyj has an ROCE of 18%.

View our latest analysis for Elisa Oyj

Does Elisa Oyj Have A Good ROCE?

One way to assess ROCE is to compare similar companies. In our analysis, Elisa Oyj's ROCE is meaningfully higher than the 8.6% average in the Telecom industry. I think that's good to see, since it implies the company is better than other companies at making the most of its capital. Setting aside the comparison to its industry for a moment, Elisa Oyj's ROCE in absolute terms currently looks quite high.

You can click on the image below to see (in greater detail) how Elisa Oyj's past growth compares to other companies.

HLSE:ELISA Past Revenue and Net Income April 28th 2020
HLSE:ELISA Past Revenue and Net Income April 28th 2020

Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is, after all, simply a snap shot of a single year. Since the future is so important for investors, you should check out our free report on analyst forecasts for Elisa Oyj.

Do Elisa Oyj's Current Liabilities Skew Its 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Elisa Oyj has total assets of €2.9b and current liabilities of €682m. As a result, its current liabilities are equal to approximately 24% of its total assets. This is quite a low level of current liabilities which would not greatly boost the already high ROCE.

The Bottom Line On Elisa Oyj's ROCE

This is good to see, and with such a high ROCE, Elisa Oyj may be worth a closer look. There might be better investments than Elisa Oyj out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.

I will like Elisa 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.