Returns On Capital Are Showing Encouraging Signs At Watches of Switzerland Group (LON:WOSG)

There are a few key trends to look for if we want to identify the next multi-bagger. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, Watches of Switzerland Group (LON:WOSG) 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. To calculate this metric for Watches of Switzerland Group, this is the formula:

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

0.12 = UK£73m ÷ (UK£875m - UK£243m) (Based on the trailing twelve months to October 2020).

Therefore, Watches of Switzerland Group has an ROCE of 12%. That's a relatively normal return on capital, and it's around the 11% generated by the Specialty Retail industry.

Check out our latest analysis for Watches of Switzerland Group

Above you can see how the current ROCE for Watches of Switzerland 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 report for Watches of Switzerland Group.

What Does the ROCE Trend For Watches of Switzerland Group Tell Us?

The trends we've noticed at Watches of Switzerland Group are quite reassuring. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 12%. The amount of capital employed has increased too, by 289%. So we're very much inspired by what we're seeing at Watches of Switzerland Group thanks to its ability to profitably reinvest capital.

One more thing to note, Watches of Switzerland Group has decreased current liabilities to 28% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

The Bottom Line On Watches of Switzerland Group's ROCE

In summary, it's great to see that Watches of Switzerland Group can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And with the stock having performed exceptionally well over the last year, these patterns are being accounted for by investors. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

One more thing, we've spotted 1 warning sign facing Watches of Switzerland Group that you might find interesting.

While Watches of Switzerland Group 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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