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

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at KGHM Polska Miedz (WSE:KGH) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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)

0.045 = zł1.8b ÷ (zł53b - zł13b) (Based on the trailing twelve months to June 2024).

Therefore, KGHM Polska Miedz has an ROCE of 4.5%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 7.9%.

View 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, you can check out the forecasts from the analysts covering KGHM Polska Miedz for free.

How Are Returns Trending?

In terms of KGHM Polska Miedz's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 7.8% over the last five years. 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

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. Since the stock has gained an impressive 95% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

While KGHM Polska Miedz doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation for KGH on our platform.

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.

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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.