Yahoo Finance Be Wary Of Polaris Renewable Energy (TSE:PIF) And Its Returns On Capital
If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Having said that, from a first glance at Polaris Renewable Energy (TSE:PIF) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
What Is 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. Analysts use this formula to calculate it for Polaris Renewable Energy:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.041 = US$20m ÷ (US$531m - US$28m) (Based on the trailing twelve months to March 2023).
Thus, Polaris Renewable Energy has an ROCE of 4.1%. In absolute terms, that's a low return and it also under-performs the Renewable Energy industry average of 6.5%.
Check out our latest analysis for Polaris Renewable Energy
In the above chart we have measured Polaris Renewable Energy'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 Polaris Renewable Energy.
The Trend Of ROCE
In terms of Polaris Renewable Energy's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 7.5%, but since then they've fallen to 4.1%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
In Conclusion...
In summary, despite lower returns in the short term, we're encouraged to see that Polaris Renewable Energy is reinvesting for growth and has higher sales as a result. In light of this, the stock has only gained 6.4% over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.
Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for Polaris Renewable Energy (of which 2 are concerning!) that you should know about.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.
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