Yahoo Finance Polaris Renewable Energy (TSE:PIF) Will Be Looking To Turn Around Its Returns
When researching a stock for investment, what can tell us that the company is in decline? 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. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. Having said that, after a brief look, Polaris Renewable Energy (TSE:PIF) we aren't filled with optimism, but let's investigate further.
What Is Return On Capital Employed (ROCE)?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its 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)
0.057 = US$28m ÷ (US$519m - US$31m) (Based on the trailing twelve months to December 2023).
So, Polaris Renewable Energy has an ROCE of 5.7%. In absolute terms, that's a low return but it's around the Renewable Energy industry average of 5.0%.
View 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, you can check out the forecasts from the analysts covering Polaris Renewable Energy for free.
What The Trend Of ROCE Can Tell Us
There is reason to be cautious about Polaris Renewable Energy, given the returns are trending downwards. About five years ago, returns on capital were 8.4%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Polaris Renewable Energy becoming one if things continue as they have.
The Bottom Line On Polaris Renewable Energy's ROCE
All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Despite the concerning underlying trends, the stock has actually gained 29% over the last five years, so it might be that the investors are expecting the trends to reverse. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.
One final note, you should learn about the 3 warning signs we've spotted with Polaris Renewable Energy (including 2 which are a bit concerning) .
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
