Has KLON Spólka Akcyjna (WSE:KLN) Got What It Takes To Become A Multi-Bagger?

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. Although, when we looked at KLON Spólka Akcyjna (WSE:KLN), it didn't seem to tick all of these boxes.

What is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for KLON Spólka Akcyjna, this is the formula:

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

0.032 = zł1.2m ÷ (zł43m - zł5.4m) (Based on the trailing twelve months to September 2020).

So, KLON Spólka Akcyjna has an ROCE of 3.2%. Ultimately, that's a low return and it under-performs the Forestry industry average of 6.8%.

See our latest analysis for KLON Spólka Akcyjna

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of KLON Spólka Akcyjna, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at KLON Spólka Akcyjna, we didn't gain much confidence. To be more specific, ROCE has fallen from 9.4% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a side note, KLON Spólka Akcyjna has done well to pay down its current liabilities to 12% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

In Conclusion...

In summary, we're somewhat concerned by KLON Spólka Akcyjna's diminishing returns on increasing amounts of capital. Investors haven't taken kindly to these developments, since the stock has declined 36% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

If you want to know some of the risks facing KLON Spólka Akcyjna we've found 4 warning signs (3 are potentially serious!) that you should be aware of before investing here.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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