There Are Reasons To Feel Uneasy About Zaklady Azotowe Pulawy's (WSE:ZAP) Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. 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.

Understanding 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. The formula for this calculation on Zaklady Azotowe Pulawy is:

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

0.065 = zł270m ÷ (zł5.5b - zł1.4b) (Based on the trailing twelve months to December 2020).

So, Zaklady Azotowe Pulawy has an ROCE of 6.5%. On its own, that's a low figure but it's around the 7.8% average generated by the Chemicals industry.

Check out our latest analysis for Zaklady Azotowe Pulawy

Historical performance is a great place to start when researching a stock so above you can see the gauge for Zaklady Azotowe Pulawy's ROCE against it's prior returns. If you'd like to look at how Zaklady Azotowe Pulawy has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Zaklady Azotowe Pulawy's ROCE Trending?

In terms of Zaklady Azotowe Pulawy's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 15%, but since then they've fallen to 6.5%. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

What We Can Learn From Zaklady Azotowe Pulawy's ROCE

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 49% depreciation in their investment, so it appears the market might not like these trends either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

On a final note, we found 2 warning signs for Zaklady Azotowe Pulawy (1 doesn't sit too well with us) you should be aware of.

While Zaklady Azotowe Pulawy may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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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