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Today we’ll evaluate Polski Koncern Naftowy ORLEN Spólka Akcyjna (WSE:PKN) to determine whether it could have potential as an investment idea. In particular, we’ll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.
First up, we’ll look at what ROCE is and how we calculate it. Next, we’ll compare it to others in its industry. Last but not least, we’ll look at what impact its current liabilities have on its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE is a measure of a company’s yearly pre-tax profit (its return), relative to the capital employed in the business. Generally speaking a higher ROCE is better. Overall, it is a valuable metric that has its flaws. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since ‘No two businesses are exactly alike.’
So, How Do We Calculate ROCE?
The formula for calculating the return on capital employed is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
Or for Polski Koncern Naftowy ORLEN Spólka Akcyjna:
0.13 = zł6.1b ÷ (zł64b – zł17b) (Based on the trailing twelve months to December 2018.)
Therefore, Polski Koncern Naftowy ORLEN Spólka Akcyjna has an ROCE of 13%.
Is Polski Koncern Naftowy ORLEN Spólka Akcyjna’s ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. Using our data, Polski Koncern Naftowy ORLEN Spólka Akcyjna’s ROCE appears to be around the 13% average of the Oil and Gas industry. Separate from Polski Koncern Naftowy ORLEN Spólka Akcyjna’s performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Remember that most companies like Polski Koncern Naftowy ORLEN Spólka Akcyjna are cyclical businesses. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
What Are Current Liabilities, And How Do They Affect Polski Koncern Naftowy ORLEN Spólka Akcyjna’s ROCE?
Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Polski Koncern Naftowy ORLEN Spólka Akcyjna has total assets of zł64b and current liabilities of zł17b. Therefore its current liabilities are equivalent to approximately 26% of its total assets. Current liabilities are minimal, limiting the impact on ROCE.
The Bottom Line On Polski Koncern Naftowy ORLEN Spólka Akcyjna’s ROCE
Overall, Polski Koncern Naftowy ORLEN Spólka Akcyjna has a decent ROCE and could be worthy of further research. Of course you might be able to find a better stock than Polski Koncern Naftowy ORLEN Spólka Akcyjna. So you may wish to see this free collection of other companies that have grown earnings strongly.
If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.