Should You Be Impressed By Cyfrowy Polsat's (WSE:CPS) Returns on Capital?

By
Simply Wall St
Published
February 25, 2021
WSE:CPS

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. However, after investigating Cyfrowy Polsat (WSE:CPS), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What is it?

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. To calculate this metric for Cyfrowy Polsat, this is the formula:

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

0.066 = zł1.9b ÷ (zł33b - zł4.7b) (Based on the trailing twelve months to September 2020).

Therefore, Cyfrowy Polsat has an ROCE of 6.6%. Ultimately, that's a low return and it under-performs the Media industry average of 16%.

Check out our latest analysis for Cyfrowy Polsat

roce
WSE:CPS Return on Capital Employed February 25th 2021

Above you can see how the current ROCE for Cyfrowy Polsat compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Cyfrowy Polsat doesn't inspire confidence. Around five years ago the returns on capital were 11%, but since then they've fallen to 6.6%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a related note, Cyfrowy Polsat has decreased its current liabilities to 14% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

What We Can Learn From Cyfrowy Polsat's ROCE

Bringing it all together, while we're somewhat encouraged by Cyfrowy Polsat's reinvestment in its own business, we're aware that returns are shrinking. And investors may be recognizing these trends since the stock has only returned a total of 27% to shareholders over the last five years. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

One more thing, we've spotted 2 warning signs facing Cyfrowy Polsat that you might find interesting.

While Cyfrowy Polsat 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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