# Izolacja Jarocin Spolka Akcyjna (WSE:IZO)’s Return on Capital

I am writing today to help inform people who are new to the stock market and looking to gauge the potential return on investment in Izolacja Jarocin Spolka Akcyjna (WSE:IZO).

Buying Izolacja Jarocin Spolka Akcyjna makes you a partial owner of the company. Your equity share is granted in return for the capital provided to the business to operate, and in order for an investment to be successful the business has to create earnings from the funds that make up this capital. Your return is tied to IZO’s ability to do this because the amount earned is used to invest in opportunities to grow the business or payout dividends, which are the two sources of return on investment. To understand Izolacja Jarocin Spolka Akcyjna’s capital returns we will look at a useful metric called return on capital employed. This will tell us if the company is growing your capital and placing you in good stead to sell your shares at a profit.

### ROCE: Explanation and Calculation

When you choose to invest in a company, there is an opportunity cost because that money could’ve been invested elsewhere. The cost of missing out on another opportunity comes in the form of the potential long term gain you could’ve received, which is dependent on the gap between the return on capital you could’ve achieved and that of the company you invested in. Hence, capital returns are very important, and should be examined before you invest in conjunction with a certain benchmark that represents the minimum return you require to be compensated for the risk of missing out on other potentially lucrative investments. We’ll look at Izolacja Jarocin Spolka Akcyjna’s returns by computing return on capital employed, which will tell us what the company can generate from the money spent in operations. IZO’s ROCE is calculated below:

ROCE Calculation for IZO

Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)

Capital Employed = (Total Assets – Current Liabilities)

∴ ROCE = zł901k ÷ (zł20m – zł7.3m) = 8.1%

As you can see, IZO earned PLN8.1 from every PLN100 you invested over the previous twelve months. Comparing this to a healthy 15% benchmark shows Izolacja Jarocin Spolka Akcyjna is currently unable to return a satisfactory amount to owners for the use of their capital, which isn’t good for investors who have forgone other potentially solid companies.

### A deeper look

The underperforming ROCE is not ideal for Izolacja Jarocin Spolka Akcyjna investors if the company is unable to turn things around. But if the underlying variables (earnings and capital employed) improve, IZO’s ROCE may increase, in which case your portfolio could benefit from holding the company. So it is important for investors to understand what is going on under the hood and look at how these variables have been behaving. Looking three years in the past, it is evident that IZO’s ROCE has risen from 5.8%, indicating the company’s capital returns have stengthened. Similarly, the movement in the earnings variable shows a jump from zł410k to zł901k whilst the amount of capital employed also grew but by a proportionally lesser volume, which suggests the larger ROCE is due to a growth in earnings relative to capital requirements.

### Next Steps

Although Izolacja Jarocin Spolka Akcyjna’s ROCE is currently below the acceptable benchmark, the company has triggered an upward trend over the recent past which could signal an opportunity for a solid return on investment in the long term. It is important to know that ROCE does not dictate returns alone, so you need to consider other fundamentals in the business such as future prospects and valuation to determine whether there is potential for return by focusing our attention elsewhere. Izolacja Jarocin Spolka Akcyjna’s fundamentals can be explored with the links I’ve provided below if you are interested, otherwise you can start looking at other high-performing stocks.

1. Future Outlook: What are well-informed industry analysts predicting for IZO’s future growth? Take a look at our free research report of analyst consensus for IZO’s outlook.
2. Valuation: What is IZO worth today? Despite the unattractive ROCE, is the outlook correctly factored in to the price? The intrinsic value infographic in our free research report helps visualize whether IZO is currently undervalued by the market.
3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.