Zaklady Azotowe Pulawy (WSE:ZAP) Is Looking To Continue Growing Its Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in Zaklady Azotowe Pulawy's (WSE:ZAP) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What Is It?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its 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)

0.18 = zł816m ÷ (zł7.4b - zł2.9b) (Based on the trailing twelve months to December 2022).

Thus, Zaklady Azotowe Pulawy has an ROCE of 18%. That's a relatively normal return on capital, and it's around the 16% 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're interested in investigating Zaklady Azotowe Pulawy's past further, check out this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

Investors would be pleased with what's happening at Zaklady Azotowe Pulawy. The data shows that returns on capital have increased substantially over the last five years to 18%. The amount of capital employed has increased too, by 29%. So we're very much inspired by what we're seeing at Zaklady Azotowe Pulawy thanks to its ability to profitably reinvest capital.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 40% of its operations, which isn't ideal. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

The Bottom Line

All in all, it's terrific to see that Zaklady Azotowe Pulawy is reaping the rewards from prior investments and is growing its capital base. Given the stock has declined 21% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.

One more thing to note, we've identified 2 warning signs with Zaklady Azotowe Pulawy and understanding them should be part of your investment process.

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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.