Here's What To Make Of Gelsenwasser's (FRA:WWG) Decelerating Rates Of Return

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. Although, when we looked at Gelsenwasser (FRA:WWG), it didn't seem to tick all of these boxes.

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)

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

Thus, Gelsenwasser has an ROCE of 2.8%. In absolute terms, that's a low return and it also under-performs the Integrated Utilities industry average of 6.3%.

View our latest analysis for Gelsenwasser

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 Gelsenwasser's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Gelsenwasser Tell Us?

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. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

Another point to note, we noticed the company has increased current liabilities 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...

Long story short, while Gelsenwasser has been reinvesting its capital, the returns that it's generating haven't increased. Since the stock has declined 14% over the last five years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Gelsenwasser has the makings of a multi-bagger.

Gelsenwasser does have some risks, we noticed 2 warning signs (and 1 which is a bit unpleasant) we think you should know about.

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.