Grupa Azoty's (WSE:ATT) Returns On Capital Not Reflecting Well On The Business

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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Grupa Azoty (WSE:ATT), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What is it?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Grupa Azoty:

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

0.04 = zł581m ÷ (zł20b - zł5.8b) (Based on the trailing twelve months to June 2021).

Therefore, Grupa Azoty has an ROCE of 4.0%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 9.2%.

Check out 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 to see what analysts are forecasting going forward, you should check out our free report for Grupa Azoty.

So How Is Grupa Azoty's ROCE Trending?

On the surface, the trend of ROCE at Grupa Azoty doesn't inspire confidence. Around five years ago the returns on capital were 8.7%, but since then they've fallen to 4.0%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, Grupa Azoty's current liabilities have increased over the last five years to 29% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 4.0%. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.

What We Can Learn From Grupa Azoty's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Grupa Azoty. And there could be an opportunity here if other metrics look good too, because the stock has declined 52% in the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

One final note, you should learn about the 2 warning signs we've spotted with Grupa Azoty (including 1 which is concerning) .

While Grupa Azoty 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.