Grupa Azoty (WSE:ATT) May Have Issues Allocating Its Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Grupa Azoty (WSE:ATT), it didn't seem to tick all of these boxes.

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 Grupa Azoty, this is the formula:

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

0.041 = zł527m ÷ (zł16b - zł3.6b) (Based on the trailing twelve months to September 2020).

So, Grupa Azoty has an ROCE of 4.1%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 7.8%.

Check out our latest analysis for Grupa Azoty

Above you can see how the current ROCE for Grupa Azoty compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Grupa Azoty.

The Trend Of ROCE

On the surface, the trend of ROCE at Grupa Azoty doesn't inspire confidence. Over the last five years, returns on capital have decreased to 4.1% from 8.1% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

In Conclusion...

To conclude, we've found that Grupa Azoty is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 60% in the last five years. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

One more thing, we've spotted 2 warning signs facing Grupa Azoty that you might find interesting.

While Grupa Azoty 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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