Here's What We Make Of Lubelski Wegiel Bogdanka's (WSE:LWB) Returns On Capital

When researching a stock for investment, what can tell us that the company is in decline? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. And from a first read, things don't look too good at Lubelski Wegiel Bogdanka (WSE:LWB), so let's see why.

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. To calculate this metric for Lubelski Wegiel Bogdanka, this is the formula:

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

0.021 = zł84m ÷ (zł4.4b - zł434m) (Based on the trailing twelve months to September 2020).

Therefore, Lubelski Wegiel Bogdanka has an ROCE of 2.1%. Ultimately, that's a low return and it under-performs the Oil and Gas industry average of 6.7%.

See our latest analysis for Lubelski Wegiel Bogdanka

In the above chart we have measured Lubelski Wegiel Bogdanka's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Lubelski Wegiel Bogdanka here for free.

What Does the ROCE Trend For Lubelski Wegiel Bogdanka Tell Us?

We are a bit worried about the trend of returns on capital at Lubelski Wegiel Bogdanka. About five years ago, returns on capital were 8.3%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Lubelski Wegiel Bogdanka becoming one if things continue as they have.

The Key Takeaway

In summary, it's unfortunate that Lubelski Wegiel Bogdanka is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 40% from where it was five years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Lubelski Wegiel Bogdanka (of which 1 can't be ignored!) that you should know about.

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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