We Like These Underlying Return On Capital Trends At Zaklady Przemyslu Cukierniczego Otmuchów (WSE:OTM)

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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 on that note, Zaklady Przemyslu Cukierniczego Otmuchów (WSE:OTM) looks quite promising in regards to its trends of return on capital.

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. To calculate this metric for Zaklady Przemyslu Cukierniczego Otmuchów, this is the formula:

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

0.19 = zł27m ÷ (zł236m - zł96m) (Based on the trailing twelve months to March 2024).

Thus, Zaklady Przemyslu Cukierniczego Otmuchów has an ROCE of 19%. On its own, that's a standard return, however it's much better than the 12% generated by the Food industry.

Check out our latest analysis for Zaklady Przemyslu Cukierniczego Otmuchów

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Zaklady Przemyslu Cukierniczego Otmuchów's past further, check out this free graph covering Zaklady Przemyslu Cukierniczego Otmuchów's past earnings, revenue and cash flow.

So How Is Zaklady Przemyslu Cukierniczego Otmuchów's ROCE Trending?

We're delighted to see that Zaklady Przemyslu Cukierniczego Otmuchów is reaping rewards from its investments and has now broken into profitability. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 19%, which is always encouraging. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. Because in the end, a business can only get so efficient.

On a side note, Zaklady Przemyslu Cukierniczego Otmuchów's current liabilities are still rather high at 41% of total assets. 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line

As discussed above, Zaklady Przemyslu Cukierniczego Otmuchów appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if Zaklady Przemyslu Cukierniczego Otmuchów can keep these trends up, it could have a bright future ahead.

One more thing, we've spotted 2 warning signs facing Zaklady Przemyslu Cukierniczego Otmuchów that you might find interesting.

While Zaklady Przemyslu Cukierniczego Otmuchów isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.