Przedsiebiorstwo Hydrauliki Silowej HYDROTOR (WSE:HDR) Might Be Having Difficulty Using Its Capital Effectively

If you're looking for a multi-bagger, there's a few things to keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Przedsiebiorstwo Hydrauliki Silowej HYDROTOR (WSE:HDR) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. To calculate this metric for Przedsiebiorstwo Hydrauliki Silowej HYDROTOR, this is the formula:

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

0.022 = zł3.4m ÷ (zł196m - zł42m) (Based on the trailing twelve months to June 2023).

So, Przedsiebiorstwo Hydrauliki Silowej HYDROTOR has an ROCE of 2.2%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 12%.

See our latest analysis for Przedsiebiorstwo Hydrauliki Silowej HYDROTOR

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Przedsiebiorstwo Hydrauliki Silowej HYDROTOR, check out these free graphs here.

What Does the ROCE Trend For Przedsiebiorstwo Hydrauliki Silowej HYDROTOR Tell Us?

In terms of Przedsiebiorstwo Hydrauliki Silowej HYDROTOR's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 9.3%, but since then they've fallen to 2.2%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

The Key Takeaway

Bringing it all together, while we're somewhat encouraged by Przedsiebiorstwo Hydrauliki Silowej HYDROTOR's reinvestment in its own business, we're aware that returns are shrinking. And with the stock having returned a mere 17% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

One more thing to note, we've identified 4 warning signs with Przedsiebiorstwo Hydrauliki Silowej HYDROTOR and understanding these should be part of your investment process.

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.