Returns On Capital Are Showing Encouraging Signs At Sfinks Polska (WSE:SFS)

Did you know there are some financial metrics that can provide clues of a potential 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. So when we looked at Sfinks Polska (WSE:SFS) and its trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What Is It?

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 Sfinks Polska, this is the formula:

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

0.058 = zł3.8m ÷ (zł109m - zł42m) (Based on the trailing twelve months to June 2024).

Thus, Sfinks Polska has an ROCE of 5.8%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 8.1%.

See our latest analysis for Sfinks Polska

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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Sfinks Polska.

How Are Returns Trending?

You'd find it hard not to be impressed with the ROCE trend at Sfinks Polska. We found that the returns on capital employed over the last five years have risen by 157%. The company is now earning zł0.06 per dollar of capital employed. Speaking of capital employed, the company is actually utilizing 62% less than it was five years ago, which can be indicative of a business that's improving its efficiency. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.

Our Take On Sfinks Polska's ROCE

From what we've seen above, Sfinks Polska has managed to increase it's returns on capital all the while reducing it's capital base. Since the total return from the stock has been almost flat over the last five years, there might be an opportunity here if the valuation looks good. So researching this company further and determining whether or not these trends will continue seems justified.

If you'd like to know about the risks facing Sfinks Polska, we've discovered 3 warning signs that you should be aware of.

While Sfinks Polska 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.