This analysis is intended to introduce important early concepts to people who are starting to invest and want a simplistic look at the return on Wajax Corporation (TSE:WJX) stock.
Buying Wajax makes you a partial owner of the company. This share represents a portion of capital used by the company to operate the business, and it is important the company is able to use the capital base efficiently to create adequate cash flows for you as an investor. You need to pay attention to this because your return on investment is linked to dividends and internal investments to improve the business, which can only occur if the company is expected to produce adequate earnings with the capital that has been provided. Therefore, looking at how efficiently Wajax is able to use capital to create earnings will help us understand your potential return. Investors use many different metrics but the analysis below focuses on return on capital employed (ROCE). Let’s take a look at what it can tell us.
Calculating Return On Capital Employed for WJX
You only have a finite amount of capital to invest, so there are only so many companies that you can add to your portfolio. Accordingly, before you invest you need to assess the capital returns that the company has produced with reference to a certain benchmark to ensure that you are confident in the business' ability to grow your capital at a level that grants an investment over other companies. A good metric to use is return on capital employed (ROCE), which helps us gauge how much income can be created from the funds needed to operate the business. This metric will tell us if Wajax is good at growing investor capital. WJX’s ROCE is calculated below:
ROCE Calculation for WJX
Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)
Capital Employed = (Total Assets - Current Liabilities)
∴ ROCE = CA$60.90m ÷ (CA$760.39m - CA$273.83m) = 12.52%
As you can see, WJX earned CA$12.5 from every CA$100 you invested over the previous twelve months. This shows Wajax provides an uninspiring capital return that is slightly below the 15% ROCE that is typically considered to be a strong benchmark. Nevertheless, if WJX is clever with their reinvestments or dividend payments, investors can still grow their capital but may not see the same compounded performance as other high-returning companies.
Then why have investors invested?
The underperforming ROCE is not ideal for Wajax investors if the company is unable to turn things around. But if the underlying variables (earnings and capital employed) improve, WJX's ROCE may increase, in which case your portfolio could benefit from holding the company. Therefore, investors need to understand the trend of the inputs in the formula above, so that they can see if there is an opportunity to invest. Looking at the past 3 year period shows us that WJX boosted investor return on capital employed from 11.12%. Similarly, the movement in the earnings variable shows a jump from CA$55.81m to CA$60.90m whilst capital employed has decreased because of an increase in the use of current liabilities (use of borrowed money to create earnings) , which is an indication that Wajax has increased the ROCE for investors by producing more earnings and using less capital.
Despite WJX's current ROCE remains at an unattractive level, the company has triggered an upward trend over the recent past which could signal an opportunity for a solid return on investment in the long term. It is important to know that ROCE does not dictate returns alone, so you need to consider other fundamentals in the business such as future prospects and valuation to determine whether there is potential for return by focusing our attention elsewhere. If you're interested in diving deeper, take a look at what I've linked below for further information on these fundamentals and other potential investment opportunities.
- Future Outlook: What are well-informed industry analysts predicting for WJX’s future growth? Take a look at our free research report of analyst consensus for WJX’s outlook.
- Valuation: What is WJX worth today? Despite the unattractive ROCE, is the outlook correctly factored in to the price? The intrinsic value infographic in our free research report helps visualize whether WJX is currently undervalued by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
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The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at email@example.com.
Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article 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.