Why The 30% Return On Capital At Grodno Spólka Akcyjna (WSE:GRN) Should Have Your Attention

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Grodno Spólka Akcyjna's (WSE:GRN) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

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 Grodno Spólka Akcyjna:

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

0.30 = zł53m ÷ (zł483m - zł305m) (Based on the trailing twelve months to September 2022).

Therefore, Grodno Spólka Akcyjna has an ROCE of 30%. On its own, that's a very good return and it's on par with the returns earned by companies in a similar industry.

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're interested in investigating Grodno Spólka Akcyjna's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Grodno Spólka Akcyjna's ROCE Trending?

Investors would be pleased with what's happening at Grodno Spólka Akcyjna. The data shows that returns on capital have increased substantially over the last five years to 30%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 118%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

On a side note, Grodno Spólka Akcyjna's current liabilities are still rather high at 63% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

What We Can Learn From Grodno Spólka Akcyjna's ROCE

In summary, it's great to see that Grodno Spólka Akcyjna can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 26% to shareholders. So with that in mind, we think the stock deserves further research.

Grodno Spólka Akcyjna does have some risks though, and we've spotted 3 warning signs for Grodno Spólka Akcyjna that you might be interested in.

Grodno Spólka Akcyjna is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.