WestStar Industrial (ASX:WSI) Is Reinvesting At Lower Rates Of Return

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think WestStar Industrial (ASX:WSI) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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 WestStar Industrial is:

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

0.15 = AU$2.3m ÷ (AU$32m - AU$17m) (Based on the trailing twelve months to December 2020).

Thus, WestStar Industrial has an ROCE of 15%. In absolute terms, that's a satisfactory return, but compared to the Metals and Mining industry average of 8.3% it's much better.

See our latest analysis for WestStar Industrial

Historical performance is a great place to start when researching a stock so above you can see the gauge for WestStar Industrial's ROCE against it's prior returns. If you're interested in investigating WestStar Industrial's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is WestStar Industrial's ROCE Trending?

In terms of WestStar Industrial's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 47% over the last one year. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

On a related note, WestStar Industrial has decreased its current liabilities to 53% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE. Keep in mind 53% is still pretty high, so those risks are still somewhat prevalent.

What We Can Learn From WestStar Industrial's ROCE

To conclude, we've found that WestStar Industrial is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 25% in the last three years. Therefore based on the analysis done in this article, we don't think WestStar Industrial has the makings of a multi-bagger.

WestStar Industrial does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those doesn't sit too well with us...

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.

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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. 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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