SferaNet Spólka Akcyjna's (WSE:SFN) Returns On Capital Not Reflecting Well On The Business

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. Having said that, from a first glance at SferaNet Spólka Akcyjna (WSE:SFN) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. Analysts use this formula to calculate it for SferaNet Spólka Akcyjna:

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

0.016 = zł596k ÷ (zł41m - zł4.3m) (Based on the trailing twelve months to September 2020).

Thus, SferaNet Spólka Akcyjna has an ROCE of 1.6%. Ultimately, that's a low return and it under-performs the Telecom industry average of 8.6%.

See our latest analysis for SferaNet Spólka Akcyjna

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'd like to look at how SferaNet Spólka Akcyjna has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For SferaNet Spólka Akcyjna Tell Us?

When we looked at the ROCE trend at SferaNet Spólka Akcyjna, we didn't gain much confidence. To be more specific, ROCE has fallen from 4.5% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, SferaNet Spólka Akcyjna has done well to pay down its current liabilities to 10% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line On SferaNet Spólka Akcyjna's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that SferaNet Spólka Akcyjna is reinvesting for growth and has higher sales as a result. However, despite the promising trends, the stock has fallen 24% over the last five years, so there might be an opportunity here for astute investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

If you want to know some of the risks facing SferaNet Spólka Akcyjna we've found 4 warning signs (2 are a bit concerning!) that you should be aware of before investing here.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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