Przedsiebiorstwo Produkcyjno - Handlowe KOMPAP (WSE:KMP) Has Some Difficulty Using Its Capital Effectively

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. So after we looked into Przedsiebiorstwo Produkcyjno - Handlowe KOMPAP (WSE:KMP), the trends above didn't look too great.

We've discovered 4 warning signs about Przedsiebiorstwo Produkcyjno - Handlowe KOMPAP. View them for free.

Return On Capital Employed (ROCE): What Is It?

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 Przedsiebiorstwo Produkcyjno - Handlowe KOMPAP, this is the formula:

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

0.034 = zł3.2m ÷ (zł114m - zł20m) (Based on the trailing twelve months to December 2024).

Thus, Przedsiebiorstwo Produkcyjno - Handlowe KOMPAP has an ROCE of 3.4%. In absolute terms, that's a low return and it also under-performs the Forestry industry average of 6.3%.

View our latest analysis for Przedsiebiorstwo Produkcyjno - Handlowe KOMPAP

Historical performance is a great place to start when researching a stock so above you can see the gauge for Przedsiebiorstwo Produkcyjno - Handlowe KOMPAP's ROCE against it's prior returns. If you're interested in investigating Przedsiebiorstwo Produkcyjno - Handlowe KOMPAP's past further, check out this free graph covering Przedsiebiorstwo Produkcyjno - Handlowe KOMPAP's past earnings, revenue and cash flow.

The Trend Of ROCE

There is reason to be cautious about Przedsiebiorstwo Produkcyjno - Handlowe KOMPAP, given the returns are trending downwards. To be more specific, the ROCE was 8.3% five years ago, but since then it has dropped noticeably. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Przedsiebiorstwo Produkcyjno - Handlowe KOMPAP becoming one if things continue as they have.

What We Can Learn From Przedsiebiorstwo Produkcyjno - Handlowe KOMPAP's ROCE

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. Yet despite these poor fundamentals, the stock has gained a huge 370% over the last five years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for Przedsiebiorstwo Produkcyjno - Handlowe KOMPAP (of which 1 is concerning!) that you should know about.

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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.