Weng Fine Art's (FRA:WFA) Returns On Capital Are Heading Higher

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in Weng Fine Art's (FRA:WFA) returns on capital, so let's have a look.

What is Return On Capital Employed (ROCE)?

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 Weng Fine Art:

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

0.13 = €5.0m ÷ (€39m - €1.0m) (Based on the trailing twelve months to December 2021).

So, Weng Fine Art has an ROCE of 13%. That's a relatively normal return on capital, and it's around the 12% generated by the Specialty Retail industry.

See our latest analysis for Weng Fine Art

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Weng Fine Art's past further, check out this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

Weng Fine Art is displaying some positive trends. The data shows that returns on capital have increased substantially over the last five years to 13%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 75%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

On a related note, the company's ratio of current liabilities to total assets has decreased to 2.5%, which basically reduces it's funding from the likes of short-term creditors or suppliers. This tells us that Weng Fine Art has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

The Key Takeaway

To sum it up, Weng Fine Art has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And a remarkable 214% total return over the last three years tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

Weng Fine Art does have some risks, we noticed 5 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

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.