TAURON Polska Energia (WSE:TPE) Has More To Do To Multiply In Value Going Forward

There are a few key trends to look for if we want to identify the next multi-bagger. 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 TAURON Polska Energia (WSE:TPE) 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?

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 TAURON Polska Energia, this is the formula:

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

0.067 = zł2.2b ÷ (zł43b - zł10b) (Based on the trailing twelve months to March 2022).

Thus, TAURON Polska Energia has an ROCE of 6.7%. Ultimately, that's a low return and it under-performs the Electric Utilities industry average of 9.4%.

View our latest analysis for TAURON Polska Energia

Above you can see how the current ROCE for TAURON Polska Energia compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What The Trend Of ROCE Can Tell Us

Things have been pretty stable at TAURON Polska Energia, with its capital employed and returns on that capital staying somewhat the same for the last five years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So unless we see a substantial change at TAURON Polska Energia in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger.

Another point to note, we noticed the company has increased current liabilities over the last five years. This is intriguing because if current liabilities hadn't increased to 24% of total assets, this reported ROCE would probably be less than6.7% because total capital employed would be higher.The 6.7% ROCE could be even lower if current liabilities weren't 24% of total assets, because the the formula would show a larger base of total capital employed. With that in mind, just be wary if this ratio increases in the future, because if it gets particularly high, this brings with it some new elements of risk.

What We Can Learn From TAURON Polska Energia's ROCE

In a nutshell, TAURON Polska Energia has been trudging along with the same returns from the same amount of capital over the last five years. Since the stock has declined 18% over the last five years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think TAURON Polska Energia has the makings of a multi-bagger.

One more thing, we've spotted 2 warning signs facing TAURON Polska Energia that you might find interesting.

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.