Is Stalprofil (WSE:STF) A Future Multi-bagger?

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Stalprofil (WSE:STF) and its trend of ROCE, we really liked what we saw.

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 Stalprofil is:

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

0.07 = zł33m ÷ (zł984m - zł518m) (Based on the trailing twelve months to September 2020).

So, Stalprofil has an ROCE of 7.0%. In absolute terms, that's a low return and it also under-performs the Trade Distributors industry average of 13%.

See our latest analysis for Stalprofil

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Stalprofil, check out these free graphs here.

The Trend Of ROCE

Stalprofil has broken into the black (profitability) and we're sure it's a sight for sore eyes. The company now earns 7.0% on its capital, because five years ago it was incurring losses. While returns have increased, the amount of capital employed by Stalprofil has remained flat over the period. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 53% of the business, which is more than it was five years ago. And with current liabilities at those levels, that's pretty high.

In Conclusion...

In summary, we're delighted to see that Stalprofil has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And since the stock has fallen 38% over the last five years, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.

Stalprofil does have some risks though, and we've spotted 2 warning signs for Stalprofil that you might be interested in.

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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