The Return Trends At TheWorks.co.uk (LON:WRKS) Look Promising

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at TheWorks.co.uk (LON:WRKS) so let's look a bit deeper.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on TheWorks.co.uk is:

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

0.19 = UK£12m ÷ (UK£145m - UK£82m) (Based on the trailing twelve months to November 2024).

So, TheWorks.co.uk has an ROCE of 19%. On its own, that's a standard return, however it's much better than the 13% generated by the Specialty Retail industry.

See our latest analysis for TheWorks.co.uk

Above you can see how the current ROCE for TheWorks.co.uk compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering TheWorks.co.uk for free.

What The Trend Of ROCE Can Tell Us

You'd find it hard not to be impressed with the ROCE trend at TheWorks.co.uk. The figures show that over the last five years, returns on capital have grown by 345%. The company is now earning UK£0.2 per dollar of capital employed. Interestingly, the business may be becoming more efficient because it's applying 47% less capital than it was five years ago. TheWorks.co.uk may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 57% of its operations, which isn't ideal. 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.

The Bottom Line On TheWorks.co.uk's ROCE

In summary, it's great to see that TheWorks.co.uk has been able to turn things around and earn higher returns on lower amounts of capital. Given the stock has declined 49% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

If you'd like to know more about TheWorks.co.uk, we've spotted 3 warning signs, and 1 of them is significant.

While TheWorks.co.uk 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.

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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.