Returns On Capital Signal Tricky Times Ahead For Sanok Rubber Company Spólka Akcyjna (WSE:SNK)

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Sanok Rubber Company Spólka Akcyjna (WSE:SNK) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Sanok Rubber Company Spólka Akcyjna, this is the formula:

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

0.098 = zł76m ÷ (zł1.1b - zł292m) (Based on the trailing twelve months to June 2023).

So, Sanok Rubber Company Spólka Akcyjna has an ROCE of 9.8%. On its own that's a low return on capital but it's in line with the industry's average returns of 9.5%.

View our latest analysis for Sanok Rubber Company Spólka Akcyjna

Historical performance is a great place to start when researching a stock so above you can see the gauge for Sanok Rubber Company Spólka Akcyjna's ROCE against it's prior returns. If you'd like to look at how Sanok Rubber Company Spólka Akcyjna has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

On the surface, the trend of ROCE at Sanok Rubber Company Spólka Akcyjna doesn't inspire confidence. Around five years ago the returns on capital were 20%, but since then they've fallen to 9.8%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, Sanok Rubber Company Spólka Akcyjna has done well to pay down its current liabilities to 27% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

Our Take On Sanok Rubber Company Spólka Akcyjna's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Sanok Rubber Company Spólka Akcyjna is reinvesting for growth and has higher sales as a result. These trends are starting to be recognized by investors since the stock has delivered a 2.3% gain to shareholders who've held over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

One more thing: We've identified 2 warning signs with Sanok Rubber Company Spólka Akcyjna (at least 1 which doesn't sit too well with us) , and understanding them would certainly be useful.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.