Grupa Azoty Zaklady Chemiczne Police (WSE:PCE) Could Be Struggling To Allocate Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Grupa Azoty Zaklady Chemiczne Police (WSE:PCE), it didn't seem to tick all of these boxes.

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. Analysts use this formula to calculate it for Grupa Azoty Zaklady Chemiczne Police:

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

0.013 = zł43m ÷ (zł4.2b - zł1.0b) (Based on the trailing twelve months to September 2020).

Therefore, Grupa Azoty Zaklady Chemiczne Police has an ROCE of 1.3%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 7.8%.

Check out our latest analysis for Grupa Azoty Zaklady Chemiczne Police

Historical performance is a great place to start when researching a stock so above you can see the gauge for Grupa Azoty Zaklady Chemiczne Police's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Grupa Azoty Zaklady Chemiczne Police, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

We weren't thrilled with the trend because Grupa Azoty Zaklady Chemiczne Police's ROCE has reduced by 87% over the last five years, while the business employed 102% more capital. That being said, Grupa Azoty Zaklady Chemiczne Police raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Grupa Azoty Zaklady Chemiczne Police's earnings and if they change as a result from the capital raise. It's also worth noting the company's latest EBIT figure is within 10% of the previous year, so it's fair to assign the ROCE drop largely to the capital raise.

What We Can Learn From Grupa Azoty Zaklady Chemiczne Police's ROCE

Bringing it all together, while we're somewhat encouraged by Grupa Azoty Zaklady Chemiczne Police's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 38% over the last five years, investors may not be too optimistic on this trend improving either. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

One more thing to note, we've identified 2 warning signs with Grupa Azoty Zaklady Chemiczne Police and understanding these should be part of your investment process.

While Grupa Azoty Zaklady Chemiczne Police isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

If you’re looking to trade Grupa Azoty Zaklady Chemiczne Police, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.