Returns On Capital - An Important Metric For ERG Spólka Akcyjna (WSE:ERG)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. So when we looked at ERG Spólka Akcyjna (WSE:ERG) and its trend of ROCE, we really liked what we saw.

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. The formula for this calculation on ERG Spólka Akcyjna is:

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

0.078 = zł3.8m ÷ (zł65m - zł17m) (Based on the trailing twelve months to September 2020).

Therefore, ERG Spólka Akcyjna has an ROCE of 7.8%. Even though it's in line with the industry average of 7.8%, it's still a low return by itself.

View our latest analysis for ERG Spólka Akcyjna

Historical performance is a great place to start when researching a stock so above you can see the gauge for ERG Spólka Akcyjna's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of ERG Spólka Akcyjna, check out these free graphs here.

What Can We Tell From ERG Spólka Akcyjna's ROCE Trend?

While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. The data shows that returns on capital have increased substantially over the last five years to 7.8%. The amount of capital employed has increased too, by 33%. So we're very much inspired by what we're seeing at ERG Spólka Akcyjna thanks to its ability to profitably reinvest capital.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 26%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

What We Can Learn From ERG Spólka Akcyjna's ROCE

All in all, it's terrific to see that ERG Spólka Akcyjna is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a staggering 138% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if ERG Spólka Akcyjna can keep these trends up, it could have a bright future ahead.

One more thing, we've spotted 2 warning signs facing ERG Spólka Akcyjna that you might find interesting.

While ERG Spólka Akcyjna 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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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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