KGHM Polska Miedz (WSE:KGH) Might Be Having Difficulty Using Its Capital Effectively

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. In light of that, when we looked at KGHM Polska Miedz (WSE:KGH) and its ROCE trend, we weren't exactly thrilled.

What Is 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. 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)

0.044 = zł2.0b ÷ (zł54b - zł9.8b) (Based on the trailing twelve months to June 2023).

Therefore, KGHM Polska Miedz has an ROCE of 4.4%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 18%.

View 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're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

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

On the surface, the trend of ROCE at KGHM Polska Miedz doesn't inspire confidence. Around five years ago the returns on capital were 6.2%, but since then they've fallen to 4.4%. However it looks like KGHM Polska Miedz might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Bottom Line On KGHM Polska Miedz's ROCE

Bringing it all together, while we're somewhat encouraged by KGHM Polska Miedz's reinvestment in its own business, we're aware that returns are shrinking. And with the stock having returned a mere 32% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

Like most companies, KGHM Polska Miedz does come with some risks, and we've found 2 warning signs that you should be aware of.

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.