Returns Are Gaining Momentum At PGF Polska Grupa Fotowoltaiczna (WSE:PGV)

What trends should we look for it we want to identify stocks that can multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. 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)

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. The formula for this calculation on PGF Polska Grupa Fotowoltaiczna is:

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

0.034 = zł5.9m ÷ (zł210m - zł37m) (Based on the trailing twelve months to June 2023).

So, PGF Polska Grupa Fotowoltaiczna has an ROCE of 3.4%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 12%.

See 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'd like to look at how PGF Polska Grupa Fotowoltaiczna has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For PGF Polska Grupa Fotowoltaiczna Tell Us?

PGF Polska Grupa Fotowoltaiczna has recently broken into profitability so their prior investments seem to be paying off. About five years ago the company was generating losses but things have turned around because it's now earning 3.4% on its capital. And unsurprisingly, like most companies trying to break into the black, PGF Polska Grupa Fotowoltaiczna is utilizing 349% more capital than it was five years ago. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

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. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

In Conclusion...

Long story short, we're delighted to see that PGF Polska Grupa Fotowoltaiczna's reinvestment activities have paid off and the company is now profitable. Since the stock has returned a staggering 308% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if PGF Polska Grupa Fotowoltaiczna can keep these trends up, it could have a bright future ahead.

PGF Polska Grupa Fotowoltaiczna does have some risks, we noticed 4 warning signs (and 2 which shouldn't be ignored) we think you should know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.