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Why Orange Polska S.A.’s (WSE:OPL) Use Of Investor Capital Doesn’t Look Great

Simply Wall St

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Today we are going to look at Orange Polska S.A. (WSE:OPL) to see whether it might be an attractive investment prospect. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.

First of all, we'll work out how to calculate ROCE. Second, we'll look at its ROCE compared to similar companies. And finally, we'll look at how its current liabilities are impacting its ROCE.

Understanding Return On Capital Employed (ROCE)

ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. In general, businesses with a higher ROCE are usually better quality. In brief, it is a useful tool, but it is not without drawbacks. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that 'one dollar invested in the company generates value of more than one dollar'.

So, How Do We Calculate ROCE?

The formula for calculating the return on capital employed is:

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

Or for Orange Polska:

0.011 = zł198m ÷ (zł24b - zł5.9b) (Based on the trailing twelve months to March 2019.)

So, Orange Polska has an ROCE of 1.1%.

See our latest analysis for Orange Polska

Does Orange Polska Have A Good ROCE?

ROCE can be useful when making comparisons, such as between similar companies. Using our data, Orange Polska's ROCE appears to be significantly below the 3.4% average in the Telecom industry. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Independently of how Orange Polska compares to its industry, its ROCE in absolute terms is low; especially compared to the ~2.9% available in government bonds. It is likely that there are more attractive prospects out there.

Orange Polska's current ROCE of 1.1% is lower than its ROCE in the past, which was 2.9%, 3 years ago. This makes us wonder if the business is facing new challenges.

WSE:OPL Past Revenue and Net Income, May 14th 2019

It is important to remember that ROCE shows past performance, and is not necessarily predictive. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. ROCE is, after all, simply a snap shot of a single year. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Orange Polska.

Orange Polska's Current Liabilities And Their Impact On Its ROCE

Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that need to be paid within 12 months. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Orange Polska has total liabilities of zł5.9b and total assets of zł24b. As a result, its current liabilities are equal to approximately 24% of its total assets. This is not a high level of current liabilities, which would not boost the ROCE by much.

Our Take On Orange Polska's ROCE

That's not a bad thing, however Orange Polska has a weak ROCE and may not be an attractive investment. But note: make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.