Some Investors May Be Worried About WiseTech Global's (ASX:WTC) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating WiseTech Global (ASX:WTC), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What is it?

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. Analysts use this formula to calculate it for WiseTech Global:

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

0.093 = AU$107m ÷ (AU$1.3b - AU$170m) (Based on the trailing twelve months to December 2020).

Thus, WiseTech Global has an ROCE of 9.3%. In absolute terms, that's a low return and it also under-performs the Software industry average of 14%.

View our latest analysis for WiseTech Global

In the above chart we have measured WiseTech Global'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 WiseTech Global's ROCE Trending?

In terms of WiseTech Global's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 9.3% from 12% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

The Bottom Line

In summary, despite lower returns in the short term, we're encouraged to see that WiseTech Global is reinvesting for growth and has higher sales as a result. And the stock has done incredibly well with a 633% return over the last five years, so long term investors are no doubt ecstatic with that result. So while the underlying trends could already 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 WiseTech Global, we've discovered 2 warning signs that you should be aware of.

While WiseTech Global may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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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