The Trend Of High Returns At Stalprofil (WSE:STF) Has Us Very Interested

There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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, the ROCE of Stalprofil (WSE:STF) looks great, so lets see what the trend can tell us.

What is 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. To calculate this metric for Stalprofil, this is the formula:

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

0.22 = zł121m ÷ (zł995m - zł447m) (Based on the trailing twelve months to September 2021).

So, Stalprofil has an ROCE of 22%. On its own, that's a very good return and it's on par with the returns earned by companies in a similar industry.

Check out our latest analysis for Stalprofil

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

What Does the ROCE Trend For Stalprofil Tell Us?

Stalprofil has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 22% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Stalprofil is utilizing 34% 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.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. The current liabilities has increased to 45% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

Our Take On Stalprofil's ROCE

Long story short, we're delighted to see that Stalprofil's reinvestment activities have paid off and the company is now profitable. And since the stock has fallen 32% 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.

On a separate note, we've found 1 warning sign for Stalprofil you'll probably want to know about.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets 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.