PGF Polska Grupa Fotowoltaiczna's (WSE:PGV) Returns On Capital Are Heading Higher

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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, we've noticed some promising trends at PGF Polska Grupa Fotowoltaiczna (WSE:PGV) so let's look a bit deeper.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for PGF Polska Grupa Fotowoltaiczna:

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

0.092 = zł16m ÷ (zł210m - zł37m) (Based on the trailing twelve months to June 2023).

Therefore, PGF Polska Grupa Fotowoltaiczna has an ROCE of 9.2%. In absolute terms, that's a low return but it's around the Machinery industry average of 10%.

Check out our latest analysis for PGF Polska Grupa Fotowoltaiczna

Historical performance is a great place to start when researching a stock so above you can see the gauge for PGF Polska Grupa Fotowoltaiczna's ROCE against it's prior returns. If you're interested in investigating PGF Polska Grupa Fotowoltaiczna's past further, check out this free graph covering PGF Polska Grupa Fotowoltaiczna's past earnings, revenue and cash flow.

What Can We Tell From PGF Polska Grupa Fotowoltaiczna's ROCE Trend?

The fact that PGF Polska Grupa Fotowoltaiczna is now generating some pre-tax profits from its prior investments is very encouraging. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 9.2% on its capital. Not only that, but the company is utilizing 349% more capital than before, but that's to be expected from a company trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

On a related note, the company's ratio of current liabilities to total assets has decreased to 18%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

The Bottom Line On PGF Polska Grupa Fotowoltaiczna's ROCE

Overall, PGF Polska Grupa Fotowoltaiczna gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. Since the stock has returned a staggering 488% to shareholders over the last five years, it looks like investors are recognizing these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

PGF Polska Grupa Fotowoltaiczna does have some risks, we noticed 2 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

While PGF Polska Grupa Fotowoltaiczna 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. 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.