Returns On Capital Are Showing Encouraging Signs At Zespól Elektrocieplowni Wroclawskich KOGENERACJA (WSE:KGN)

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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in Zespól Elektrocieplowni Wroclawskich KOGENERACJA's (WSE:KGN) returns on capital, so let's have a look.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Zespól Elektrocieplowni Wroclawskich KOGENERACJA is:

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

0.10 = zł322m ÷ (zł4.2b - zł1.0b) (Based on the trailing twelve months to March 2024).

Therefore, Zespól Elektrocieplowni Wroclawskich KOGENERACJA has an ROCE of 10%. In absolute terms, that's a satisfactory return, but compared to the Integrated Utilities industry average of 6.4% it's much better.

See 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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Zespól Elektrocieplowni Wroclawskich KOGENERACJA.

How Are Returns Trending?

Zespól Elektrocieplowni Wroclawskich KOGENERACJA is displaying some positive trends. The data shows that returns on capital have increased substantially over the last five years to 10%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 42%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 24% of its operations, which isn't ideal. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.

The Bottom Line On Zespól Elektrocieplowni Wroclawskich KOGENERACJA's ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Zespól Elektrocieplowni Wroclawskich KOGENERACJA has. And with a respectable 48% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. Therefore, we think it would be worth your time to check if these trends are going to continue.

On a final note, we found 2 warning signs for Zespól Elektrocieplowni Wroclawskich KOGENERACJA (1 can't be ignored) you should be aware of.

While Zespól Elektrocieplowni Wroclawskich KOGENERACJA may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.