Sanok Rubber Company Spólka Akcyjna (WSE:SNK) May Have Issues Allocating Its Capital

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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Sanok Rubber Company Spólka Akcyjna (WSE:SNK) and its ROCE trend, we weren't exactly thrilled.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Sanok Rubber Company Spólka Akcyjna:

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

0.055 = zł35m ÷ (zł986m - zł346m) (Based on the trailing twelve months to September 2020).

So, Sanok Rubber Company Spólka Akcyjna has an ROCE of 5.5%. In absolute terms, that's a low return and it also under-performs the Auto Components industry average of 7.8%.

Check out our latest analysis for Sanok Rubber Company Spólka Akcyjna

Above you can see how the current ROCE for Sanok Rubber Company Spólka Akcyjna compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Sanok Rubber Company Spólka Akcyjna.

So How Is Sanok Rubber Company Spólka Akcyjna's ROCE Trending?

In terms of Sanok Rubber Company Spólka Akcyjna's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 26% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

In Conclusion...

We're a bit apprehensive about Sanok Rubber Company Spólka Akcyjna because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Investors haven't taken kindly to these developments, since the stock has declined 47% from where it was five years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

One more thing: We've identified 2 warning signs with Sanok Rubber Company Spólka Akcyjna (at least 1 which is significant) , and understanding them would certainly be useful.

While Sanok Rubber Company Spólka Akcyjna may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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