Sfinks Polska (WSE:SFS) Is Looking To Continue Growing Its Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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.

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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. Analysts use this formula to calculate it for Sfinks Polska:

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

0.052 = zł3.4m ÷ (zł110m - zł45m) (Based on the trailing twelve months to September 2024).

So, Sfinks Polska has an ROCE of 5.2%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 9.3%.

See our latest analysis for Sfinks Polska

Historical performance is a great place to start when researching a stock so above you can see the gauge for Sfinks Polska's ROCE against it's prior returns. 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?

We're pretty happy with how the ROCE has been trending at Sfinks Polska. The data shows that returns on capital have increased by 169% over the trailing five years. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. In regards to capital employed, Sfinks Polska appears to been achieving more with less, since the business is using 61% less capital to run its operation. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.

On a separate but related note, it's important to know that Sfinks Polska 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.

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. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 18% to shareholders. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

On a final note, we found 5 warning signs for Sfinks Polska (3 are significant) you should be aware of.

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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.