If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Zaklady Azotowe Pulawy (WSE:ZAP), it didn't seem to tick all of these boxes.
What is Return On Capital Employed (ROCE)?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Zaklady Azotowe Pulawy:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.073 = zł300m ÷ (zł5.1b - zł993m) (Based on the trailing twelve months to June 2020).
Therefore, Zaklady Azotowe Pulawy has an ROCE of 7.3%. On its own that's a low return on capital but it's in line with the industry's average returns of 7.4%.
See our latest analysis for Zaklady Azotowe Pulawy
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're interested in investigating Zaklady Azotowe Pulawy's past further, check out this free graph of past earnings, revenue and cash flow.
The Trend Of ROCE
In terms of Zaklady Azotowe Pulawy's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 7.3% from 9.4% five years ago. 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.
The Key Takeaway
From the above analysis, we find it rather worrisome that returns on capital and sales for Zaklady Azotowe Pulawy have fallen, meanwhile the business is employing more capital than it was five years ago. Long term shareholders who've owned the stock over the last five years have experienced a 48% depreciation in their investment, so it appears the market might not like these trends either. Unless these trends revert to a more positive trajectory, we would look elsewhere.
Zaklady Azotowe Pulawy does have some risks, we noticed 2 warning signs (and 1 which is significant) we think you should know about.
While Zaklady Azotowe Pulawy 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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