Be Wary Of Zespól Elektrocieplowni Wroclawskich KOGENERACJA (WSE:KGN) And Its Returns On Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Zespól Elektrocieplowni Wroclawskich KOGENERACJA (WSE:KGN), it didn't seem to tick all of these boxes.

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 Zespól Elektrocieplowni Wroclawskich KOGENERACJA:

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

0.0011 = zł2.6m ÷ (zł2.7b - zł306m) (Based on the trailing twelve months to September 2021).

So, Zespól Elektrocieplowni Wroclawskich KOGENERACJA has an ROCE of 0.1%. Ultimately, that's a low return and it under-performs the Integrated Utilities industry average of 5.9%.

Check out our latest analysis for Zespól Elektrocieplowni Wroclawskich KOGENERACJA

Historical performance is a great place to start when researching a stock so above you can see the gauge for Zespól Elektrocieplowni Wroclawskich KOGENERACJA's ROCE against it's prior returns. If you'd like to look at how Zespól Elektrocieplowni Wroclawskich KOGENERACJA has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From Zespól Elektrocieplowni Wroclawskich KOGENERACJA's ROCE Trend?

In terms of Zespól Elektrocieplowni Wroclawskich KOGENERACJA's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 8.7%, but since then they've fallen to 0.1%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

Our Take On Zespól Elektrocieplowni Wroclawskich KOGENERACJA's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Zespól Elektrocieplowni Wroclawskich KOGENERACJA is reinvesting for growth and has higher sales as a result. These growth trends haven't led to growth returns though, since the stock has fallen 66% over the last five years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

If you want to know some of the risks facing Zespól Elektrocieplowni Wroclawskich KOGENERACJA we've found 4 warning signs (1 doesn't sit too well with us!) 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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.