Capital Allocation Trends At Onde (WSE:OND) Aren't Ideal

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Onde (WSE:OND) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What Is It?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Onde:

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

0.089 = zł31m ÷ (zł680m - zł328m) (Based on the trailing twelve months to September 2022).

Thus, Onde has an ROCE of 8.9%. Ultimately, that's a low return and it under-performs the Construction industry average of 13%.

Check out our latest analysis for Onde

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

The Trend Of ROCE

In terms of Onde's historical ROCE movements, the trend isn't fantastic. Around three years ago the returns on capital were 18%, but since then they've fallen to 8.9%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, Onde's current liabilities are still rather high at 48% 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line

Bringing it all together, while we're somewhat encouraged by Onde's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 31% over the last year, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Onde has the makings of a multi-bagger.

If you want to continue researching Onde, you might be interested to know about the 2 warning signs that our analysis has discovered.

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.