Will We.Connect's (EPA:ALWEC) Growth In ROCE Persist?

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, we've noticed some promising trends at We.Connect (EPA:ALWEC) so let's look a bit deeper.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on We.Connect is:

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

0.16 = €5.7m ÷ (€112m - €76m) (Based on the trailing twelve months to December 2019).

Therefore, We.Connect has an ROCE of 16%. On its own, that's a standard return, however it's much better than the 5.6% generated by the Electronic industry.

Check out our latest analysis for We.Connect

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

So How Is We.Connect's ROCE Trending?

The trends we've noticed at We.Connect are quite reassuring. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 16%. The amount of capital employed has increased too, by 190%. So we're very much inspired by what we're seeing at We.Connect thanks to its ability to profitably reinvest capital.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 68% of the business, which is more than it was five years ago. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

In Conclusion...

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what We.Connect has. And with the stock having performed exceptionally well over the last three years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if We.Connect can keep these trends up, it could have a bright future ahead.

Like most companies, We.Connect does come with some risks, and we've found 6 warning signs that you should be aware of.

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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