Grodno Spólka Akcyjna (WSE:GRN) May Have Issues Allocating Its Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Grodno Spólka Akcyjna (WSE:GRN), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Grodno Spólka Akcyjna:

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

0.13 = zł16m ÷ (zł305m - zł178m) (Based on the trailing twelve months to December 2020).

So, Grodno Spólka Akcyjna has an ROCE of 13%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Trade Distributors industry average of 12%.

View our latest analysis for Grodno Spólka Akcyjna

Historical performance is a great place to start when researching a stock so above you can see the gauge for Grodno Spólka Akcyjna's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Grodno Spólka Akcyjna, check out these free graphs here.

What Does the ROCE Trend For Grodno Spólka Akcyjna Tell Us?

On the surface, the trend of ROCE at Grodno Spólka Akcyjna doesn't inspire confidence. To be more specific, ROCE has fallen from 20% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

Another thing to note, Grodno Spólka Akcyjna has a high ratio of current liabilities to total assets of 58%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line On Grodno Spólka Akcyjna's ROCE

While returns have fallen for Grodno Spólka Akcyjna in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And the stock has done incredibly well with a 183% return over the last five years, so long term investors are no doubt ecstatic with that result. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

If you want to know some of the risks facing Grodno Spólka Akcyjna we've found 3 warning signs (1 is significant!) that you should be aware of before investing here.

While Grodno Spólka Akcyjna isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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. 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.
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