Investors Will Want KGHM Polska Miedz's (WSE:KGH) Growth In ROCE To Persist

What trends should we look for it we want to identify stocks that can multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So on that note, KGHM Polska Miedz (WSE:KGH) looks quite promising in regards to its trends of return on capital.

What is 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 KGHM Polska Miedz, this is the formula:

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

0.13 = zł4.8b ÷ (zł45b - zł9.0b) (Based on the trailing twelve months to June 2021).

Therefore, KGHM Polska Miedz has an ROCE of 13%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Metals and Mining industry average of 15%.

See our latest analysis for KGHM Polska Miedz

In the above chart we have measured KGHM Polska Miedz'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 KGHM Polska Miedz.

What Does the ROCE Trend For KGHM Polska Miedz Tell Us?

KGHM Polska Miedz's ROCE growth is quite impressive. The figures show that over the last five years, ROCE has grown 138% whilst employing roughly the same amount of capital. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

Our Take On KGHM Polska Miedz's ROCE

In summary, we're delighted to see that KGHM Polska Miedz has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if KGHM Polska Miedz can keep these trends up, it could have a bright future ahead.

One final note, you should learn about the 3 warning signs we've spotted with KGHM Polska Miedz (including 1 which is a bit unpleasant) .

While KGHM Polska Miedz isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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.

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