The Returns On Capital At Gelsenwasser (FRA:WWG) Don't Inspire Confidence

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. 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 Gelsenwasser (FRA:WWG) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Trump has pledged to "unleash" American oil and gas and these 15 US stocks have developments that are poised to benefit.

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)

0.019 = €40m ÷ (€3.0b - €867m) (Based on the trailing twelve months to December 2024).

Therefore, Gelsenwasser has an ROCE of 1.9%. In absolute terms, that's a low return and it also under-performs the Integrated Utilities industry average of 7.5%.

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 Gelsenwasser's past earnings, revenue and cash flow.

What Does the ROCE Trend For Gelsenwasser Tell Us?

In terms of Gelsenwasser's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 2.9%, but since then they've fallen to 1.9%. 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.

The Bottom Line On Gelsenwasser's ROCE

In summary, we're somewhat concerned by Gelsenwasser's diminishing returns on increasing amounts of capital. Long term shareholders who've owned the stock over the last five years have experienced a 53% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

On a final note, we've found 1 warning sign for Gelsenwasser that we think you should be aware of.

While Gelsenwasser may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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.