What Do The Returns At Websol Energy System (NSE:WEBELSOLAR) Mean Going Forward?

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in Websol Energy System's (NSE:WEBELSOLAR) returns on capital, so let's have a look.

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 Websol Energy System, this is the formula:

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

0.0031 = ₹6.3m ÷ (₹3.1b - ₹1.0b) (Based on the trailing twelve months to March 2020).

Therefore, Websol Energy System has an ROCE of 0.3%. Ultimately, that's a low return and it under-performs the Semiconductor industry average of 0.7%.

See our latest analysis for Websol Energy System

Historical performance is a great place to start when researching a stock so above you can see the gauge for Websol Energy System's ROCE against it's prior returns. If you'd like to look at how Websol Energy System has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

We're delighted to see that Websol Energy System is reaping rewards from its investments and is now generating some pre-tax profits. Shareholders would no doubt be pleased with this because the business was loss-making four years ago but is is now generating 0.3% on its capital. Not only that, but the company is utilizing 210% more capital than before, but that's to be expected from a company trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

One more thing to note, Websol Energy System has decreased current liabilities to 34% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

The Bottom Line

Long story short, we're delighted to see that Websol Energy System's reinvestment activities have paid off and the company is now profitable. Given the stock has declined 12% in the last five years, there could be a chance of a good investment here if the valuation makes sense. So researching this company further and determining whether or not these trends will continue seems justified.

On a final note, we found 5 warning signs for Websol Energy System (2 are a bit unpleasant) you should be aware of.

While Websol Energy System isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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