Zespól Elektrowni Patnów-Adamów-Konin's (WSE:ZEP) Returns On Capital Tell Us There Is Reason To Feel Uneasy

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. On that note, looking into Zespól Elektrowni Patnów-Adamów-Konin (WSE:ZEP), we weren't too upbeat about how things were going.

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. The formula for this calculation on Zespól Elektrowni Patnów-Adamów-Konin is:

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

0.045 = zł104m ÷ (zł3.5b - zł1.2b) (Based on the trailing twelve months to June 2022).

Therefore, Zespól Elektrowni Patnów-Adamów-Konin has an ROCE of 4.5%. In absolute terms, that's a low return and it also under-performs the Electric Utilities industry average of 9.0%.

Check out the opportunities and risks within the PL Electric Utilities industry.

In the above chart we have measured Zespól Elektrowni Patnów-Adamów-Konin's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Zespól Elektrowni Patnów-Adamów-Konin.

So How Is Zespól Elektrowni Patnów-Adamów-Konin's ROCE Trending?

In terms of Zespól Elektrowni Patnów-Adamów-Konin's historical ROCE trend, it isn't fantastic. The company used to generate 8.7% on its capital five years ago but it has since fallen noticeably. What's equally concerning is that the amount of capital deployed in the business has shrunk by 33% over that same period. When you see both ROCE and capital employed diminishing, it can often be a sign of a mature and shrinking business that might be in structural decline. If these underlying trends continue, we wouldn't be too optimistic going forward.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 35%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 4.5%. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.

What We Can Learn From Zespól Elektrowni Patnów-Adamów-Konin's ROCE

In short, lower returns and decreasing amounts capital employed in the business doesn't fill us with confidence. However the stock has delivered a 63% return to shareholders over the last five years, so investors might be expecting the trends to turn around. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

Zespól Elektrowni Patnów-Adamów-Konin does have some risks though, and we've spotted 1 warning sign for Zespól Elektrowni Patnów-Adamów-Konin that you might be interested in.

While Zespól Elektrowni Patnów-Adamów-Konin 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.