Webcentral (ASX:WCG) Might Have The Makings Of A Multi-Bagger

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at Webcentral (ASX:WCG) and its trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

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 Webcentral:

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

0.035 = AU$2.8m ÷ (AU$131m - AU$51m) (Based on the trailing twelve months to December 2022).

Thus, Webcentral has an ROCE of 3.5%. In absolute terms, that's a low return and it also under-performs the IT industry average of 19%.

View our latest analysis for Webcentral

Historical performance is a great place to start when researching a stock so above you can see the gauge for Webcentral's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Webcentral, check out these free graphs here.

So How Is Webcentral's ROCE Trending?

While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. Over the last five years, returns on capital employed have risen substantially to 3.5%. Basically the business is earning more per dollar of capital invested and in addition to that, 1,664% more capital is being employed now too. So we're very much inspired by what we're seeing at Webcentral thanks to its ability to profitably reinvest capital.

What We Can Learn From Webcentral's ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Webcentral has. And since the stock has fallen 38% over the last year, there might be an opportunity here. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

If you'd like to know more about Webcentral, we've spotted 4 warning signs, and 2 of them are a bit unpleasant.

While Webcentral 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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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.