Will the Promising Trends At Atal (WSE:1AT) Continue?

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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, we've noticed some promising trends at Atal (WSE:1AT) so let's look a bit deeper.

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

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 Atal is:

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

0.092 = zł162m ÷ (zł3.0b - zł1.2b) (Based on the trailing twelve months to September 2020).

Therefore, Atal has an ROCE of 9.2%. On its own, that's a low figure but it's around the 11% average generated by the Consumer Durables industry.

Check out our latest analysis for Atal

Above you can see how the current ROCE for Atal compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

How Are Returns Trending?

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 9.2%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 131%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

On a separate but related note, it's important to know that Atal has a current liabilities to total assets ratio of 41%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line On Atal's ROCE

All in all, it's terrific to see that Atal is reaping the rewards from prior investments and is growing its capital base. And a remarkable 169% total return over the last five years tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

Atal does have some risks, we noticed 2 warning signs (and 1 which shouldn't be ignored) we think you should know about.

While Atal 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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