If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Stalprodukt (WSE:STP) and its ROCE trend, we weren't exactly thrilled.
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. To calculate this metric for Stalprodukt, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.059 = zł211m ÷ (zł4.3b - zł750m) (Based on the trailing twelve months to December 2020).
Thus, Stalprodukt has an ROCE of 5.9%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 9.6%.
Above you can see how the current ROCE for Stalprodukt compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Stalprodukt here for free.
What The Trend Of ROCE Can Tell Us
When we looked at the ROCE trend at Stalprodukt, we didn't gain much confidence. Around five years ago the returns on capital were 12%, but since then they've fallen to 5.9%. And considering revenue has dropped while employing more capital, we'd be cautious. 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.
What We Can Learn From Stalprodukt's ROCE
From the above analysis, we find it rather worrisome that returns on capital and sales for Stalprodukt have fallen, meanwhile the business is employing more capital than it was five years ago. Despite the concerning underlying trends, the stock has actually gained 25% over the last five years, so it might be that the investors are expecting the trends to reverse. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.
If you want to continue researching Stalprodukt, you might be interested to know about the 1 warning sign that our analysis has discovered.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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