If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So, when we ran our eye over PlayWay's (WSE:PLW) trend of ROCE, we really liked what we saw.
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. The formula for this calculation on PlayWay is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.40 = zł93m ÷ (zł238m - zł6.9m) (Based on the trailing twelve months to March 2020).
Thus, PlayWay has an ROCE of 40%. That's a fantastic return and not only that, it outpaces the average of 23% earned by companies in a similar industry.
Above you can see how the current ROCE for PlayWay compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for PlayWay.
How Are Returns Trending?
We'd be pretty happy with returns on capital like PlayWay. The company has employed 2,279% more capital in the last five years, and the returns on that capital have remained stable at 40%. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. If PlayWay can keep this up, we'd be very optimistic about its future.On a side note, PlayWay has done well to reduce current liabilities to 2.9% of total assets over the last five years. Effectively suppliers now fund less of the business, which can lower some elements of risk.
In short, we'd argue PlayWay has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. On top of that, the stock has rewarded shareholders with a remarkable 599% return to those who've held over the last three years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.
PlayWay does have some risks, we noticed 3 warning signs (and 1 which can't be ignored) we think you should know about.
If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets 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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