Returns On Capital Signal Tricky Times Ahead For Ciech (WSE:CIE)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. In light of that, when we looked at Ciech (WSE:CIE) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Ciech, this is the formula:

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

0.076 = zł320m ÷ (zł5.3b - zł1.1b) (Based on the trailing twelve months to September 2020).

Thus, Ciech has an ROCE of 7.6%. On its own that's a low return on capital but it's in line with the industry's average returns of 7.8%.

See our latest analysis for Ciech

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

The Trend Of ROCE

On the surface, the trend of ROCE at Ciech doesn't inspire confidence. Over the last five years, returns on capital have decreased to 7.6% from 17% 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.

The Key Takeaway

Bringing it all together, while we're somewhat encouraged by Ciech's reinvestment in its own business, we're aware that returns are shrinking. And investors appear hesitant that the trends will pick up because the stock has fallen 32% 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.

On a final note, we've found 1 warning sign for Ciech that we think you should be aware of.

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