This analysis is intended to introduce important early concepts to people who are starting to invest and want to begin learning the link between Grodno Spólka Akcyjna (WSE:GRN)’s return fundamentals and stock market performance.
If you purchase a GRN share you are effectively becoming a partner with many other shareholders. This share represents a portion of capital used by the company to operate the business, and it is important the company is able to use the capital base efficiently to create adequate cash flows for you as an investor. You need to pay attention to this because your return on investment is linked to dividends and internal investments to improve the business, which can only occur if the company is expected to produce adequate earnings with the capital that has been provided. Therefore, looking at how efficiently Grodno Spólka Akcyjna is able to use capital to create earnings will help us understand your potential return. Investors use many different metrics but the analysis below focuses on return on capital employed (ROCE). Let’s take a look at what it can tell us.
Calculating Return On Capital Employed for GRN
You only have a finite amount of capital to invest, so there are only so many companies that you can add to your portfolio. Accordingly, before you invest you need to assess the capital returns that the company has produced with reference to a certain benchmark to ensure that you are confident in the business’ ability to grow your capital at a level that grants an investment over other companies. A good metric to use is return on capital employed (ROCE), which helps us gauge how much income can be created from the funds needed to operate the business. This metric will tell us if Grodno Spólka Akcyjna is good at growing investor capital. I have calculated Grodno Spólka Akcyjna’s ROCE for you below:
ROCE Calculation for GRN
Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)
Capital Employed = (Total Assets – Current Liabilities)
∴ ROCE = zł10.73m ÷ (zł259.00m – zł167.21m) = 11.69%
The calculation above shows that GRN’s earnings were 11.69% of capital employed. This shows Grodno Spólka Akcyjna provides an uninspiring capital return that is slightly below the 15% ROCE that is typically considered to be a strong benchmark. Nevertheless, if GRN is clever with their reinvestments or dividend payments, investors can still grow their capital but may not see the same compounded performance as other high-returning companies.
A deeper look
The underperforming ROCE is not ideal for Grodno Spólka Akcyjna investors if the company is unable to turn things around. But if the underlying variables (earnings and capital employed) improve, GRN’s ROCE may increase, in which case your portfolio could benefit from holding the company. Because of this, it is important to look beyond the final value of GRN’s ROCE and understand what is happening to the individual components. Three years ago, GRN’s ROCE was 11.85%, which means the company’s capital returns have worsened. With this, the current earnings of zł10.73m improved from zł6.39m however capital employed has grown by a relatively larger volume in response to a hike in the level of total assets , indicating that the previous growth in earnings has not been able to improve ROCE because the company now needs to employ more capital to operate the business.
Grodno Spólka Akcyjna’s ROCE has decreased in the recent past and is currently at a level that makes us question whether the company is capable of providing a suitable return on investment. However, it is important to know that ROCE does not dictate returns alone, so you need to consider other fundamentals in the business such as future prospects and management ability. Grodno Spólka Akcyjna’s fundamentals can be explored with the links I’ve provided below if you are interested, otherwise you can start looking at other high-performing stocks.
- Future Outlook: What are well-informed industry analysts predicting for GRN’s future growth? Take a look at our free research report of analyst consensus for GRN’s outlook.
- Management:Have insiders been ramping up their shares to take advantage of the market’s sentiment for Grodno Spólka Akcyjna’s future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.