Returns On Capital Are Showing Encouraging Signs At Polygiene Group (STO:POLYG)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Speaking of which, we noticed some great changes in Polygiene Group's (STO:POLYG) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Polygiene Group, this is the formula:

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

0.027 = kr16m ÷ (kr622m - kr29m) (Based on the trailing twelve months to December 2022).

Thus, Polygiene Group has an ROCE of 2.7%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 13%.

View our latest analysis for Polygiene Group

Above you can see how the current ROCE for Polygiene Group 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.

SWOT Analysis for Polygiene Group

The Trend Of ROCE

We're delighted to see that Polygiene Group is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses five years ago, but now it's earning 2.7% which is a sight for sore eyes. In addition to that, Polygiene Group is employing 1,551% more capital than previously which is expected of a company that's trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

One more thing to note, Polygiene Group has decreased current liabilities to 4.7% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. This tells us that Polygiene Group has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

The Key Takeaway

To the delight of most shareholders, Polygiene Group has now broken into profitability. And since the stock has fallen 35% over the last five years, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.

One more thing, we've spotted 4 warning signs facing Polygiene Group that you might find interesting.

While Polygiene Group isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.