Returns On Capital - An Important Metric For Wentworth Resources (LON:WEN)

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. So on that note, Wentworth Resources (LON:WEN) looks quite promising in regards to its trends of return on capital.

What is 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 Wentworth Resources is:

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

0.031 = US$3.3m ÷ (US$107m - US$1.1m) (Based on the trailing twelve months to June 2020).

Therefore, Wentworth Resources has an ROCE of 3.1%. Ultimately, that's a low return and it under-performs the Oil and Gas industry average of 5.6%.

Check out our latest analysis for Wentworth Resources

In the above chart we have measured Wentworth Resources' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Wentworth Resources here for free.

How Are Returns Trending?

While the ROCE is still rather low for Wentworth Resources, we're glad to see it heading in the right direction. The data shows that returns on capital have increased by 60% over the trailing five years. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. Interestingly, the business may be becoming more efficient because it's applying 35% less capital than it was five years ago. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.

Our Take On Wentworth Resources' ROCE

In the end, Wentworth Resources has proven it's capital allocation skills are good with those higher returns from less amount of capital. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 57% return over the last year. Therefore, we think it would be worth your time to check if these trends are going to continue.

If you'd like to know about the risks facing Wentworth Resources, we've discovered 3 warning signs that you should be aware of.

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

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This article by Simply Wall St is general in nature. 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.
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