Gelsenwasser (FRA:WWG) Will Be Hoping To Turn Its Returns On Capital Around

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. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Gelsenwasser (FRA:WWG) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding 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. The formula for this calculation on Gelsenwasser is:

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

0.01 = €45m ÷ (€12b - €7.3b) (Based on the trailing twelve months to June 2022).

Therefore, Gelsenwasser has an ROCE of 1.0%. Ultimately, that's a low return and it under-performs the Integrated Utilities industry average of 5.3%.

See our latest analysis for Gelsenwasser

Historical performance is a great place to start when researching a stock so above you can see the gauge for Gelsenwasser's ROCE against it's prior returns. If you'd like to look at how Gelsenwasser has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Gelsenwasser Tell Us?

On the surface, the trend of ROCE at Gelsenwasser doesn't inspire confidence. Over the last five years, returns on capital have decreased to 1.0% from 3.2% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, Gelsenwasser's current liabilities have increased over the last five years to 62% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 1.0%. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.

Our Take On Gelsenwasser's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Gelsenwasser. These trends are starting to be recognized by investors since the stock has delivered a 29% gain to shareholders who've held over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

If you want to know some of the risks facing Gelsenwasser we've found 5 warning signs (1 shouldn't be ignored!) that you should be aware of before investing here.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.