Gelsenwasser's (FRA:WWG) Returns Have Hit A Wall

What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Gelsenwasser (FRA:WWG) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper 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. The formula for this calculation on Gelsenwasser is:

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

0.028 = €66m ÷ (€4.3b - €1.9b) (Based on the trailing twelve months to June 2023).

Therefore, Gelsenwasser has an ROCE of 2.8%. Ultimately, that's a low return and it under-performs the Integrated Utilities industry average of 6.0%.

View 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.

How Are Returns Trending?

In terms of Gelsenwasser's historical ROCE trend, it doesn't exactly demand attention. The company has consistently earned 2.8% for the last five years, and the capital employed within the business has risen 69% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

On another note, while the change in ROCE trend might not scream for attention, it's interesting that the current liabilities have actually gone up over the last five years. This is intriguing because if current liabilities hadn't increased to 46% of total assets, this reported ROCE would probably be less than2.8% because total capital employed would be higher.The 2.8% ROCE could be even lower if current liabilities weren't 46% of total assets, because the the formula would show a larger base of total capital employed. So with current liabilities at such high levels, this effectively means the likes of suppliers or short-term creditors are funding a meaningful part of the business, which in some instances can bring some risks.

In Conclusion...

As we've seen above, Gelsenwasser's returns on capital haven't increased but it is reinvesting in the business. And with the stock having returned a mere 13% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

One more thing: We've identified 3 warning signs with Gelsenwasser (at least 1 which can't be ignored) , and understanding them would certainly be useful.

While Gelsenwasser isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.