Wesfarmers (ASX:WES) Looks To Prolong Its Impressive Returns

Did you know there are some financial metrics that can provide clues of a potential 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. So, when we ran our eye over Wesfarmers' (ASX:WES) trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What Is It?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Wesfarmers:

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

0.20 = AU$3.8b ÷ (AU$27b - AU$8.5b) (Based on the trailing twelve months to December 2023).

So, Wesfarmers has an ROCE of 20%. In absolute terms that's a great return and it's even better than the Multiline Retail industry average of 9.7%.

View our latest analysis for Wesfarmers

Above you can see how the current ROCE for Wesfarmers compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Wesfarmers .

How Are Returns Trending?

Wesfarmers deserves to be commended in regards to it's returns. Over the past five years, ROCE has remained relatively flat at around 20% and the business has deployed 28% more capital into its operations. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. If Wesfarmers can keep this up, we'd be very optimistic about its future.

What We Can Learn From Wesfarmers' ROCE

In short, we'd argue Wesfarmers has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. And the stock has done incredibly well with a 139% return over the last five years, so long term investors are no doubt ecstatic with that result. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

If you'd like to know about the risks facing Wesfarmers, we've discovered 2 warning signs that you should be aware of.

Wesfarmers 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.

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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.