Watches of Switzerland Group (LON:WOSG) Hasn't Managed To Accelerate Its Returns

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. That's why when we briefly looked at Watches of Switzerland Group's (LON:WOSG) ROCE trend, we were pretty happy with what we saw.

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 Watches of Switzerland Group is:

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

0.18 = UK£144m ÷ (UK£1.0b - UK£250m) (Based on the trailing twelve months to May 2022).

So, Watches of Switzerland Group has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 14% generated by the Specialty Retail industry.

See our latest analysis for Watches of Switzerland Group

In the above chart we have measured Watches of Switzerland Group's 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 Watches of Switzerland Group here for free.

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

While the current returns on capital are decent, they haven't changed much. The company has employed 328% more capital in the last five years, and the returns on that capital have remained stable at 18%. 18% is a pretty standard return, and it provides some comfort knowing that Watches of Switzerland Group has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

On a side note, Watches of Switzerland Group has done well to reduce current liabilities to 24% of total assets over the last five years. Effectively suppliers now fund less of the business, which can lower some elements of risk.

In Conclusion...

In the end, Watches of Switzerland Group has proven its ability to adequately reinvest capital at good rates of return. And long term investors would be thrilled with the 149% return they've received over the last three years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

Watches of Switzerland Group could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation on our platform quite valuable.

While Watches of Switzerland Group 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.