Here's What's Concerning About KGHM Polska Miedz's (WSE:KGH) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think KGHM Polska Miedz (WSE:KGH) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on KGHM Polska Miedz is:

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

0.036 = zł1.6b ÷ (zł55b - zł10b) (Based on the trailing twelve months to September 2023).

Thus, KGHM Polska Miedz has an ROCE of 3.6%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 13%.

See our latest analysis for KGHM Polska Miedz

Above you can see how the current ROCE for KGHM Polska Miedz 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 analyst report for KGHM Polska Miedz .

What Can We Tell From KGHM Polska Miedz's ROCE Trend?

When we looked at the ROCE trend at KGHM Polska Miedz, we didn't gain much confidence. Around five years ago the returns on capital were 5.6%, but since then they've fallen to 3.6%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

Our Take On KGHM Polska Miedz's ROCE

To conclude, we've found that KGHM Polska Miedz is reinvesting in the business, but returns have been falling. And with the stock having returned a mere 14% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

One more thing to note, we've identified 2 warning signs with KGHM Polska Miedz and understanding them should be part of your investment process.

While KGHM Polska Miedz 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. 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.