Stock Analysis

What Do The Returns On Capital At Torpol (WSE:TOR) Tell Us?

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WSE:TOR
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Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Torpol (WSE:TOR) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What is it?

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 Torpol is:

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

0.14 = zł48m ÷ (zł1.1b - zł757m) (Based on the trailing twelve months to September 2020).

Therefore, Torpol has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 10% generated by the Construction industry.

Check out our latest analysis for Torpol

roce
WSE:TOR Return on Capital Employed December 1st 2020

Above you can see how the current ROCE for Torpol compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Torpol.

So How Is Torpol's ROCE Trending?

Things have been pretty stable at Torpol, with its capital employed and returns on that capital staying somewhat the same for the last five years. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. With that in mind, unless investment picks up again in the future, we wouldn't expect Torpol to be a multi-bagger going forward. That being the case, it makes sense that Torpol has been paying out 105% of its earnings to its shareholders. Most shareholders probably know this and own the stock for its dividend.

Another thing to note, Torpol has a high ratio of current liabilities to total assets of 69%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On Torpol's ROCE

In summary, Torpol isn't compounding its earnings but is generating stable returns on the same amount of capital employed. And with the stock having returned a mere 5.4% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

One final note, you should learn about the 3 warning signs we've spotted with Torpol (including 1 which is can't be ignored) .

While Torpol 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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