Grupa LOTOS (WSE:LTS) Has More To Do To Multiply In Value Going Forward

By
Simply Wall St
Published
June 19, 2021
WSE:LTS

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Grupa LOTOS (WSE:LTS), it didn't seem to tick all of these boxes.

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 Grupa LOTOS, this is the formula:

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

0.021 = zł357m ÷ (zł23b - zł5.9b) (Based on the trailing twelve months to March 2021).

So, Grupa LOTOS has an ROCE of 2.1%. In absolute terms, that's a low return and it also under-performs the Oil and Gas industry average of 5.1%.

View our latest analysis for Grupa LOTOS

roce
WSE:LTS Return on Capital Employed June 20th 2021

Above you can see how the current ROCE for Grupa LOTOS compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Grupa LOTOS here for free.

What Does the ROCE Trend For Grupa LOTOS Tell Us?

The returns on capital haven't changed much for Grupa LOTOS in recent years. Over the past five years, ROCE has remained relatively flat at around 2.1% and the business has deployed 24% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

In Conclusion...

As we've seen above, Grupa LOTOS' returns on capital haven't increased but it is reinvesting in the business. Since the stock has gained an impressive 91% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

If you're still interested in Grupa LOTOS it's worth checking out our FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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This article by Simply Wall St is general in nature. 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.
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