Here's What's Concerning About WODKAN Przedsiebiorstwo Wodociagów i Kanalizacji's (WSE:WOD) Returns On Capital

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. And from a first read, things don't look too good at WODKAN Przedsiebiorstwo Wodociagów i Kanalizacji (WSE:WOD), so let's see why.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for WODKAN Przedsiebiorstwo Wodociagów i Kanalizacji, this is the formula:

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

0.015 = zł3.6m ÷ (zł252m - zł8.8m) (Based on the trailing twelve months to September 2024).

So, WODKAN Przedsiebiorstwo Wodociagów i Kanalizacji has an ROCE of 1.5%. Ultimately, that's a low return and it under-performs the Water Utilities industry average of 3.1%.

Check out our latest analysis for WODKAN Przedsiebiorstwo Wodociagów i Kanalizacji

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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of WODKAN Przedsiebiorstwo Wodociagów i Kanalizacji.

So How Is WODKAN Przedsiebiorstwo Wodociagów i Kanalizacji's ROCE Trending?

There is reason to be cautious about WODKAN Przedsiebiorstwo Wodociagów i Kanalizacji, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 2.2% that they were earning five years ago. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on WODKAN Przedsiebiorstwo Wodociagów i Kanalizacji becoming one if things continue as they have.

The Bottom Line On WODKAN Przedsiebiorstwo Wodociagów i Kanalizacji's ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Investors must expect better things on the horizon though because the stock has risen 29% in the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

On a separate note, we've found 3 warning signs for WODKAN Przedsiebiorstwo Wodociagów i Kanalizacji you'll probably want to know about.

While WODKAN Przedsiebiorstwo Wodociagów i Kanalizacji 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.