Centrum Finansowe (WSE:CFS) Could Be Struggling To Allocate Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. 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 Centrum Finansowe (WSE:CFS) 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. Analysts use this formula to calculate it for Centrum Finansowe:

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

0.18 = zł9.4m ÷ (zł57m - zł3.6m) (Based on the trailing twelve months to March 2022).

Thus, Centrum Finansowe has an ROCE of 18%. That's a relatively normal return on capital, and it's around the 16% generated by the Commercial Services industry.

See our latest analysis for Centrum Finansowe

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

What Can We Tell From Centrum Finansowe's ROCE Trend?

In terms of Centrum Finansowe's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 18% from 34% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, Centrum Finansowe has done well to pay down its current liabilities to 6.3% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

In Conclusion...

In summary, Centrum Finansowe is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors appear hesitant that the trends will pick up because the stock has fallen 14% in the last five years. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 5 warning signs for Centrum Finansowe (of which 2 are concerning!) that you should know about.

While Centrum Finansowe 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. 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.