Returns On Capital Tell Us A Lot About Atlanta Poland (WSE:ATP)

What financial metrics can indicate to us that a company is maturing or even in decline? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. So after glancing at the trends within Atlanta Poland (WSE:ATP), we weren't too hopeful.

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 Atlanta Poland, this is the formula:

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

0.075 = zł8.4m ÷ (zł154m - zł42m) (Based on the trailing twelve months to September 2020).

Thus, Atlanta Poland has an ROCE of 7.5%. On its own, that's a low figure but it's around the 8.5% average generated by the Consumer Retailing industry.

View our latest analysis for Atlanta Poland

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'd like to look at how Atlanta Poland has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Atlanta Poland Tell Us?

We are a bit worried about the trend of returns on capital at Atlanta Poland. About five years ago, returns on capital were 9.9%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Atlanta Poland becoming one if things continue as they have.

On a side note, Atlanta Poland's current liabilities have increased over the last five years to 27% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 7.5%. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

The Bottom Line On Atlanta Poland's ROCE

In summary, it's unfortunate that Atlanta Poland is generating lower returns from the same amount of capital. Yet despite these concerning fundamentals, the stock has performed strongly with a 76% return over the last five years, so investors appear very optimistic. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

On a separate note, we've found 5 warning signs for Atlanta Poland you'll probably want to know about.

While Atlanta Poland 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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