WODKAN Przedsiebiorstwo Wodociagów i Kanalizacji (WSE:WOD) Could Be Struggling To Allocate Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at WODKAN Przedsiebiorstwo Wodociagów i Kanalizacji (WSE:WOD) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What Is It?

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)

0.0053 = zł1.3m ÷ (zł250m - zł8.3m) (Based on the trailing twelve months to December 2023).

So, WODKAN Przedsiebiorstwo Wodociagów i Kanalizacji has an ROCE of 0.5%. In absolute terms, that's a low return and it also under-performs the Water Utilities industry average of 2.8%.

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.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at WODKAN Przedsiebiorstwo Wodociagów i Kanalizacji doesn't inspire confidence. Around five years ago the returns on capital were 1.3%, but since then they've fallen to 0.5%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. 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 Bottom Line On WODKAN Przedsiebiorstwo Wodociagów i Kanalizacji's ROCE

In summary, WODKAN Przedsiebiorstwo Wodociagów i Kanalizacji is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Although the market must be expecting these trends to improve because the stock has gained 45% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Like most companies, WODKAN Przedsiebiorstwo Wodociagów i Kanalizacji does come with some risks, and we've found 2 warning signs that you should be aware of.

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.