Be Wary Of Grupa Azoty (WSE:ATT) And Its Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Grupa Azoty (WSE:ATT) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. The formula for this calculation on Grupa Azoty is:

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

0.036 = zł521m ÷ (zł19b - zł4.6b) (Based on the trailing twelve months to March 2021).

Thus, Grupa Azoty has an ROCE of 3.6%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 9.6%.

See our latest analysis for Grupa Azoty

In the above chart we have measured Grupa Azoty'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 Grupa Azoty here for free.

How Are Returns Trending?

When we looked at the ROCE trend at Grupa Azoty, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 3.6% from 10% five years ago. However it looks like Grupa Azoty might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Key Takeaway

In summary, Grupa Azoty is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors appear hesitant that the trends will pick up because the stock has fallen 58% in the last five years. Therefore based on the analysis done in this article, we don't think Grupa Azoty has the makings of a multi-bagger.

If you want to continue researching Grupa Azoty, you might be interested to know about the 1 warning sign that our analysis has discovered.

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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