The Returns On Capital At Zespól Elektrocieplowni Wroclawskich KOGENERACJA (WSE:KGN) Don't Inspire Confidence

What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. Having said that, from a first glance at Zespól Elektrocieplowni Wroclawskich KOGENERACJA (WSE:KGN) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. To calculate this metric for Zespól Elektrocieplowni Wroclawskich KOGENERACJA, this is the formula:

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

0.044 = zł109m ÷ (zł3.0b - zł472m) (Based on the trailing twelve months to June 2022).

Therefore, Zespól Elektrocieplowni Wroclawskich KOGENERACJA has an ROCE of 4.4%. In absolute terms, that's a low return and it also under-performs the Integrated Utilities industry average of 6.1%.

View 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'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 The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Zespól Elektrocieplowni Wroclawskich KOGENERACJA doesn't inspire confidence. Over the last five years, returns on capital have decreased to 4.4% from 8.1% five years ago. 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.

The Key Takeaway

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 69% 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 3 warning signs (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

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.

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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.