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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So on that note, Polaris IT Group (WSE:PIT) looks quite promising in regards to its trends of return on capital.
Return On Capital Employed (ROCE): What is it?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Polaris IT Group:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.058 = zł3.3m ÷ (zł143m - zł87m) (Based on the trailing twelve months to September 2020).
Therefore, Polaris IT Group has an ROCE of 5.8%. In absolute terms, that's a low return and it also under-performs the Specialty Retail industry average of 11%.
View our latest analysis for Polaris IT Group
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Polaris IT Group, check out these free graphs here.
What Does the ROCE Trend For Polaris IT Group Tell Us?
The fact that Polaris IT Group is now generating some pre-tax profits from its prior investments is very encouraging. About five years ago the company was generating losses but things have turned around because it's now earning 5.8% on its capital. Not only that, but the company is utilizing 11,912% more capital than before, but that's to be expected from a company trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.
For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 61% of the business, which is more than it was five years ago. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.
The Bottom Line On Polaris IT Group's ROCE
Long story short, we're delighted to see that Polaris IT Group's reinvestment activities have paid off and the company is now profitable. Since the stock has returned a staggering 440% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Polaris IT Group can keep these trends up, it could have a bright future ahead.
On a final note, we found 4 warning signs for Polaris IT Group (1 makes us a bit uncomfortable) you should be aware of.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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About WSE:PIT
Polaris IT Group
Polaris IT Group S.A. provide hardware and software solutions for security, AI, image recognition and analysis, streaming and online education, and healthcare fields in Poland.
Excellent balance sheet slight.