What Do The Returns On Capital At Wagners Holding (ASX:WGN) Tell Us?

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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Wagners Holding (ASX:WGN) and its ROCE trend, we weren't exactly thrilled.

What is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Wagners Holding is:

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

0.054 = AU$9.8m ÷ (AU$292m - AU$110m) (Based on the trailing twelve months to December 2019).

Therefore, Wagners Holding has an ROCE of 5.4%. In absolute terms, that's a low return but it's around the Basic Materials industry average of 6.2%.

View our latest analysis for Wagners Holding

In the above chart we have a measured Wagners Holding's 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.

So How Is Wagners Holding's ROCE Trending?

Unfortunately, the trend isn't great with ROCE falling from 36% two years ago, while capital employed has grown 55%. Usually this isn't ideal, but given Wagners Holding conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Wagners Holding might not have received a full period of earnings contribution from it.

In Conclusion...

In summary, Wagners Holding is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors appear hesitant that the trends will pick up because the stock has fallen 45% in the last year. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

One more thing: We've identified 5 warning signs with Wagners Holding (at least 2 which are potentially serious) , and understanding them would certainly be useful.

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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