The Return Trends At Zespól Elektrocieplowni Wroclawskich KOGENERACJA (WSE:KGN) Look Promising

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Zespól Elektrocieplowni Wroclawskich KOGENERACJA (WSE:KGN) and its trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from 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)

0.12 = zł325m ÷ (zł4.2b - zł1.5b) (Based on the trailing twelve months to March 2023).

So, Zespól Elektrocieplowni Wroclawskich KOGENERACJA has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Integrated Utilities industry average of 5.6% it's much better.

See our latest analysis for Zespól Elektrocieplowni Wroclawskich KOGENERACJA

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're interested in investigating Zespól Elektrocieplowni Wroclawskich KOGENERACJA's past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

Investors would be pleased with what's happening at Zespól Elektrocieplowni Wroclawskich KOGENERACJA. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 12%. 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 24%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

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 35% 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.

What We Can Learn From Zespól Elektrocieplowni Wroclawskich KOGENERACJA's ROCE

To sum it up, Zespól Elektrocieplowni Wroclawskich KOGENERACJA has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And since the stock has fallen 36% over the last five years, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.

Zespól Elektrocieplowni Wroclawskich KOGENERACJA does have some risks though, and we've spotted 1 warning sign for Zespól Elektrocieplowni Wroclawskich KOGENERACJA that you might be interested in.

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.