What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, the ROCE of Polaris (NYSE:PII) looks great, so lets see what the trend can tell us.
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. To calculate this metric for Polaris, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.21 = US$608m ÷ (US$5.2b - US$2.3b) (Based on the trailing twelve months to June 2022).
So, Polaris has an ROCE of 21%. While that is an outstanding return, the rest of the Leisure industry generates similar returns, on average.
In the above chart we have measured Polaris' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What Does the ROCE Trend For Polaris Tell Us?
The trends we've noticed at Polaris are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 21%. The amount of capital employed has increased too, by 40%. So we're very much inspired by what we're seeing at Polaris thanks to its ability to profitably reinvest capital.
For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 45% of its operations, which isn't ideal. And with current liabilities at those levels, that's pretty high.
A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Polaris has. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 49% return over the last five years. In light of that, we think it's worth looking further into this stock because if Polaris can keep these trends up, it could have a bright future ahead.
Polaris does have some risks, we noticed 4 warning signs (and 2 which make us uncomfortable) we think you should know about.
Polaris is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.
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.
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