There Are Reasons To Feel Uneasy About Relpol's (WSE:RLP) Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. However, after briefly looking over the numbers, we don't think Relpol (WSE:RLP) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Relpol is:

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

0.061 = zł6.3m ÷ (zł137m - zł33m) (Based on the trailing twelve months to September 2022).

So, Relpol has an ROCE of 6.1%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 14%.

View our latest analysis for Relpol

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

What Can We Tell From Relpol's ROCE Trend?

In terms of Relpol's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 8.7% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

The Bottom Line On Relpol's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Relpol is reinvesting for growth and has higher sales as a result. These trends don't appear to have influenced returns though, because the total return from the stock has been mostly flat over the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Relpol does have some risks, we noticed 4 warning signs (and 1 which is a bit unpleasant) we think you should know about.

While Relpol may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.