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Why Fondia Oyj’s (HEL:FONDIA) Return On Capital Employed Is Impressive

Simply Wall St

Today we'll evaluate Fondia Oyj (HEL:FONDIA) to determine whether it could have potential as an investment idea. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.

First, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. Then we'll determine how its current liabilities are affecting 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. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.

So, How Do We Calculate ROCE?

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 Fondia Oyj:

0.21 = €1.4m ÷ (€11m - €4.2m) (Based on the trailing twelve months to June 2019.)

So, Fondia Oyj has an ROCE of 21%.

Check out our latest analysis for Fondia Oyj

Is Fondia Oyj's ROCE Good?

ROCE can be useful when making comparisons, such as between similar companies. Fondia Oyj's ROCE appears to be substantially greater than the 7.9% average in the Professional Services 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. Regardless of the industry comparison, in absolute terms, Fondia Oyj's ROCE currently appears to be excellent.

Fondia Oyj's current ROCE of 21% is lower than 3 years ago, when the company reported a 70% ROCE. Therefore we wonder if the company is facing new headwinds. The image below shows how Fondia Oyj's ROCE compares to its industry, and you can click it to see more detail on its past growth.

HLSE:FONDIA Past Revenue and Net Income, January 1st 2020

When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Since the future is so important for investors, you should check out our free report on analyst forecasts for Fondia Oyj.

How Fondia Oyj's Current Liabilities Impact Its ROCE

Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Fondia Oyj has total assets of €11m and current liabilities of €4.2m. As a result, its current liabilities are equal to approximately 38% of its total assets. Fondia Oyj has a medium level of current liabilities, boosting its ROCE somewhat.

The Bottom Line On Fondia Oyj's ROCE

Even so, it has a great ROCE, and could be an attractive prospect for further research. There might be better investments than Fondia 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.

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.