If you are looking for a multi-bagger, there are a few things to look out for. In a perfect world, we would like a business to invest more capital in their business, and ideally the returns from that capital increase as well. Ultimately, this demonstrates that this is a company that reinvests its profits at increasing rates of return. Speaking of which, we have noticed some big changes in Polaris IT Group (WSE: PIT) capital returns, so let’s take a look.
Return on capital employed (ROCE): what is it?
For those who don’t know, ROCE is a measure of a company’s annual pre-tax profit (its return), relative to the capital employed in the company. The formula for this calculation on Polaris IT Group is:
Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)
0.058 = zł3.3m ÷ (zł143m – zł87m) (Based on the last twelve months up to September 2020).
Thereby, Polaris IT Group posts a ROCE of 5.8%. In absolute terms, this is a low return and it is also below the 18% specialty retail industry average.
Check out our latest review for Polaris IT Group
Although the past is not representative of the future, it can be useful to know the historical performance of a company, which is why we have this graph above. If you want to delve into the history of Polaris IT Group earnings, revenue and cash flow, check out these free graphics here.
The ROCE trend
We are delighted to see that Polaris IT Group is reaping the rewards of its investments and is now generating pre-tax profits. The company was losing five years ago, but is now gaining 5.8%, which is a sight to behold. Not only that, but the business is using 11.912% more capital than before, but that’s to be expected of a business trying to become profitable. We like this trend because it tells us that the company has profitable reinvestment opportunities, and if it keeps moving forward it can lead to multi-bagger performance.
For the record, there was a noticeable increase in the company’s current liabilities over the period, so we attribute some of the ROCE growth to that. Basically, the business now has short-term suppliers or creditors funding about 61% of its operations, which is not ideal. Given its fairly high ratio, we remind investors that short-term liabilities at these levels can lead to risk in some companies.
Polaris IT Group ROCE result
In short, we are delighted to see that Polaris IT Group’s reinvestment activities have paid off and the business is now profitable. Given that the stock has delivered 37% to its shareholders over the past five years, it may be fair to think that investors are not yet fully aware of the promising trends. With that in mind, we would dig deeper into this stock in case there are more traits that could cause it to multiply in the long term.
One more thing to note, we have identified 3 warning signs with Polaris IT Group and understanding them should be part of your investment process.
For those who like to invest in solid companies, Check it out free list of companies with strong balance sheets and high returns on equity.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.