Returns On Capital At WODKAN Przedsiebiorstwo Wodociagów i Kanalizacji (WSE:WOD) Paint A Concerning Picture

What financial metrics can indicate to us that a company is maturing or even in decline? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. In light of that, from a first glance at WODKAN Przedsiebiorstwo Wodociagów i Kanalizacji (WSE:WOD), we've spotted some signs that it could be struggling, so let's investigate.

What is Return On Capital Employed (ROCE)?

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 WODKAN Przedsiebiorstwo Wodociagów i Kanalizacji, this is the formula:

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

0.0047 = zł1.2m ÷ (zł252m - zł4.9m) (Based on the trailing twelve months to December 2021).

So, WODKAN Przedsiebiorstwo Wodociagów i Kanalizacji has an ROCE of 0.5%. Ultimately, that's a low return and it under-performs the Water Utilities industry average of 4.6%.

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, revenue and cash flow of WODKAN Przedsiebiorstwo Wodociagów i Kanalizacji, check out these free graphs here.

What Can We Tell From WODKAN Przedsiebiorstwo Wodociagów i Kanalizacji's ROCE Trend?

There is reason to be cautious about WODKAN Przedsiebiorstwo Wodociagów i Kanalizacji, given the returns are trending downwards. About five years ago, returns on capital were 0.6%, however they're now substantially lower than that as we saw above. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect WODKAN Przedsiebiorstwo Wodociagów i Kanalizacji to turn into a multi-bagger.

The Bottom Line

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 62% return. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

If you'd like to know more about WODKAN Przedsiebiorstwo Wodociagów i Kanalizacji, we've spotted 4 warning signs, and 2 of them can't be ignored.

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.