What Can The Trends At Polimex-Mostostal (WSE:PXM) Tell Us About Their Returns?

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at Polimex-Mostostal (WSE:PXM) 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. To calculate this metric for Polimex-Mostostal, this is the formula:

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

0.059 = zł58m ÷ (zł2.0b - zł972m) (Based on the trailing twelve months to September 2020).

So, Polimex-Mostostal has an ROCE of 5.9%. Ultimately, that's a low return and it under-performs the Construction industry average of 12%.

See our latest analysis for Polimex-Mostostal

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

So How Is Polimex-Mostostal's ROCE Trending?

It's great to see that Polimex-Mostostal has started to generate some pre-tax earnings from prior investments. While the business is profitable now, it used to be incurring losses on invested capital five years ago. In regards to capital employed, Polimex-Mostostal is using 22% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. The reduction could indicate that the company is selling some assets, and considering returns are up, they appear to be selling the right ones.

Another thing to note, Polimex-Mostostal has a high ratio of current liabilities to total assets of 49%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

What We Can Learn From Polimex-Mostostal's ROCE

In summary, it's great to see that Polimex-Mostostal has been able to turn things around and earn higher returns on lower amounts of capital. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 6.3% to shareholders. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

Polimex-Mostostal does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those can't be ignored...

While Polimex-Mostostal 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. 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.
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