Why Wirtualna Polska Holding S.A.’s (WSE:WPL) Use Of Investor Capital Doesn’t Look Great

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Today we are going to look at Wirtualna Polska Holding S.A. (WSE:WPL) to see whether it might be an attractive investment prospect. In particular, we’ll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.

First, we’ll go over how we calculate ROCE. Second, we’ll look at its ROCE compared to similar companies. Finally, we’ll look at how its current liabilities affect its ROCE.

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

ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. In general, businesses with a higher ROCE are usually better quality. In brief, it is a useful tool, but it is not without drawbacks. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since ‘No two businesses are exactly alike.’

So, How Do We Calculate ROCE?

Analysts use this formula to calculate return on capital employed:

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

Or for Wirtualna Polska Holding:

0.13 = zł121m ÷ (zł1.1b – zł187m) (Based on the trailing twelve months to March 2019.)

Therefore, Wirtualna Polska Holding has an ROCE of 13%.

Check out our latest analysis for Wirtualna Polska Holding

Is Wirtualna Polska Holding’s ROCE Good?

ROCE is commonly used for comparing the performance of similar businesses. We can see Wirtualna Polska Holding’s ROCE is meaningfully below the Interactive Media and Services industry average of 21%. This performance could be negative if sustained, as it suggests the business may underperform its industry. Independently of how Wirtualna Polska Holding compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.

WSE:WPL Past Revenue and Net Income, July 5th 2019
WSE:WPL Past Revenue and Net Income, July 5th 2019

When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. ROCE is only a point-in-time measure. Since the future is so important for investors, you should check out our free report on analyst forecasts for Wirtualna Polska Holding.

How Wirtualna Polska Holding’s Current Liabilities Impact Its ROCE

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Wirtualna Polska Holding has total assets of zł1.1b and current liabilities of zł187m. Therefore its current liabilities are equivalent to approximately 17% of its total assets. Current liabilities are minimal, limiting the impact on ROCE.

What We Can Learn From Wirtualna Polska Holding’s ROCE

Overall, Wirtualna Polska Holding has a decent ROCE and could be worthy of further research. Wirtualna Polska Holding looks strong on this analysis, but there are plenty of other companies that could be a good opportunity . Here is a free list of companies growing earnings rapidly.

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We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.