Is Polwax (WSE:PWX) Using Capital Effectively?

When researching a stock for investment, what can tell us that the company is in decline? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. And from a first read, things don't look too good at Polwax (WSE:PWX), so let's see why.

What is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Polwax:

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

0.014 = zł994k ÷ (zł125m - zł53m) (Based on the trailing twelve months to September 2020).

Thus, Polwax has an ROCE of 1.4%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 7.8%.

See our latest analysis for Polwax

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

What Does the ROCE Trend For Polwax Tell Us?

We are a bit worried about the trend of returns on capital at Polwax. Unfortunately the returns on capital have diminished from the 38% that they were earning five years ago. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect Polwax to turn into a multi-bagger.

Another thing to note, Polwax has a high ratio of current liabilities to total assets of 43%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On Polwax'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. Investors haven't taken kindly to these developments, since the stock has declined 34% from where it was five years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

On a final note, we found 5 warning signs for Polwax (3 are a bit unpleasant) you should be aware of.

While Polwax 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. 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.
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