Zespól Elektrocieplowni Wroclawskich KOGENERACJA's (WSE:KGN) Returns On Capital Not Reflecting Well On The Business

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. 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.

Return On Capital Employed (ROCE): What is it?

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. 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)

0.054 = zł127m ÷ (zł2.9b - zł508m) (Based on the trailing twelve months to December 2020).

So, Zespól Elektrocieplowni Wroclawskich KOGENERACJA has an ROCE of 5.4%. Even though it's in line with the industry average of 5.1%, it's still a low return by itself.

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'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.

So How Is Zespól Elektrocieplowni Wroclawskich KOGENERACJA's ROCE Trending?

When we looked at the ROCE trend at Zespól Elektrocieplowni Wroclawskich KOGENERACJA, we didn't gain much confidence. To be more specific, ROCE has fallen from 8.4% over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Key Takeaway

Bringing it all together, while we're somewhat encouraged by Zespól Elektrocieplowni Wroclawskich KOGENERACJA's reinvestment in its own business, we're aware that returns are shrinking. And in the last five years, the stock has given away 46% so the market doesn't look too hopeful on these trends strengthening any time soon. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

If you'd like to know about the risks facing Zespól Elektrocieplowni Wroclawskich KOGENERACJA, we've discovered 1 warning sign that you should be aware of.

While Zespól Elektrocieplowni Wroclawskich KOGENERACJA isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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