Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. So on that note, Pamapol (WSE:PMP) looks quite promising in regards to its trends of return on capital.
What is Return On Capital Employed (ROCE)?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Pamapol:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.088 = zł13m ÷ (zł368m - zł216m) (Based on the trailing twelve months to September 2020).
Thus, Pamapol has an ROCE of 8.8%. In absolute terms, that's a low return but it's around the Food industry average of 9.5%.
Check out our latest analysis for Pamapol
Historical performance is a great place to start when researching a stock so above you can see the gauge for Pamapol's ROCE against it's prior returns. If you're interested in investigating Pamapol's past further, check out this free graph of past earnings, revenue and cash flow.
How Are Returns Trending?
Pamapol has not disappointed with their ROCE growth. The figures show that over the last five years, ROCE has grown 56% whilst employing roughly the same amount of capital. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.
On a separate but related note, it's important to know that Pamapol has a current liabilities to total assets ratio of 59%, 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.
The Bottom Line
In summary, we're delighted to see that Pamapol has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 67% return over the last five years. In light of that, we think it's worth looking further into this stock because if Pamapol can keep these trends up, it could have a bright future ahead.
One more thing: We've identified 4 warning signs with Pamapol (at least 1 which is a bit unpleasant) , and understanding these would certainly be useful.
While Pamapol 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. 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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About WSE:PMP
Good value with imperfect balance sheet.
