There Are Reasons To Feel Uneasy About Wynnstay Group's (LON:WYN) Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Wynnstay Group (LON:WYN), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What Is It?

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 Wynnstay Group is:

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

0.052 = UK£7.9m ÷ (UK£221m - UK£69m) (Based on the trailing twelve months to October 2024).

So, Wynnstay Group has an ROCE of 5.2%. Ultimately, that's a low return and it under-performs the Food industry average of 13%.

View our latest analysis for Wynnstay Group

Above you can see how the current ROCE for Wynnstay Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Wynnstay Group .

The Trend Of ROCE

When we looked at the ROCE trend at Wynnstay Group, we didn't gain much confidence. Around five years ago the returns on capital were 7.8%, but since then they've fallen to 5.2%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

The Bottom Line On Wynnstay Group's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Wynnstay Group have fallen, meanwhile the business is employing more capital than it was five years ago. In spite of that, the stock has delivered a 37% return to shareholders who held over the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

If you want to continue researching Wynnstay Group, you might be interested to know about the 3 warning signs that our analysis has discovered.

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.