Weng Fine Art (FRA:WFA) Might Be Having Difficulty Using Its Capital Effectively

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at Weng Fine Art (FRA:WFA) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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

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. To calculate this metric for Weng Fine Art, this is the formula:

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

0.043 = €1.2m ÷ (€37m - €7.5m) (Based on the trailing twelve months to December 2022).

Thus, Weng Fine Art has an ROCE of 4.3%. On its own that's a low return on capital but it's in line with the industry's average returns of 4.4%.

See our latest analysis for Weng Fine Art

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

So How Is Weng Fine Art's ROCE Trending?

On the surface, the trend of ROCE at Weng Fine Art doesn't inspire confidence. Around five years ago the returns on capital were 7.9%, but since then they've fallen to 4.3%. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

What We Can Learn From Weng Fine Art's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Weng Fine Art have fallen, meanwhile the business is employing more capital than it was five years ago. In spite of that, the stock has delivered a 24% return to shareholders who held over the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

Weng Fine Art does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is concerning...

While Weng Fine Art 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.