Here's What To Make Of Krynica Vitamin's (WSE:KVT) Decelerating Rates Of Return

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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Krynica Vitamin (WSE:KVT) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Krynica Vitamin is:

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

0.064 = zł6.9m ÷ (zł227m - zł117m) (Based on the trailing twelve months to March 2024).

So, Krynica Vitamin has an ROCE of 6.4%. Ultimately, that's a low return and it under-performs the Beverage industry average of 9.8%.

Check out our latest analysis for Krynica Vitamin

Historical performance is a great place to start when researching a stock so above you can see the gauge for Krynica Vitamin's ROCE against it's prior returns. If you're interested in investigating Krynica Vitamin's past further, check out this free graph covering Krynica Vitamin's past earnings, revenue and cash flow.

So How Is Krynica Vitamin's ROCE Trending?

The returns on capital haven't changed much for Krynica Vitamin in recent years. Over the past five years, ROCE has remained relatively flat at around 6.4% and the business has deployed 22% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

On a separate but related note, it's important to know that Krynica Vitamin has a current liabilities to total assets ratio of 52%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On Krynica Vitamin's ROCE

Long story short, while Krynica Vitamin has been reinvesting its capital, the returns that it's generating haven't increased. Yet to long term shareholders the stock has gifted them an incredible 214% return in the last five years, so the market appears to be rosy about its future. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

Krynica Vitamin does have some risks, we noticed 3 warning signs (and 2 which make us uncomfortable) we think you should know about.

While Krynica Vitamin may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com