Returns On Capital At Polenergia (WSE:PEP) Have Stalled

There are a few key trends to look for if we want to identify the next multi-bagger. 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. 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 Polenergia (WSE:PEP), it didn't seem to tick all of these boxes.

What Is 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. Analysts use this formula to calculate it for Polenergia:

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

0.085 = zł512m ÷ (zł6.7b - zł686m) (Based on the trailing twelve months to September 2024).

Thus, Polenergia has an ROCE of 8.5%. In absolute terms, that's a low return, but it's much better than the Renewable Energy industry average of 6.4%.

Check out our latest analysis for Polenergia

Above you can see how the current ROCE for Polenergia compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Polenergia for free.

The Trend Of ROCE

The returns on capital haven't changed much for Polenergia in recent years. The company has consistently earned 8.5% for the last five years, and the capital employed within the business has risen 172% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

The Bottom Line On Polenergia's ROCE

Long story short, while Polenergia has been reinvesting its capital, the returns that it's generating haven't increased. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 195% gain to shareholders who have held over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

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

While Polenergia 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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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.