Watches of Switzerland Group (LON:WOSG) Is Looking To Continue Growing Its Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at Watches of Switzerland Group (LON:WOSG) and its trend of ROCE, we really liked what we saw.

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 Watches of Switzerland Group is:

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

0.14 = UK£93m ÷ (UK£827m - UK£189m) (Based on the trailing twelve months to May 2021).

Thus, Watches of Switzerland Group has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Specialty Retail industry average of 12% it's much better.

See 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, you can check out the forecasts from the analysts covering Watches of Switzerland Group here for free.

How Are Returns Trending?

We like the trends that we're seeing from Watches of Switzerland Group. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 14%. Basically the business is earning more per dollar of capital invested and in addition to that, 256% more capital is being employed now too. So we're very much inspired by what we're seeing at Watches of Switzerland Group thanks to its ability to profitably reinvest capital.

On a related note, the company's ratio of current liabilities to total assets has decreased to 23%, which basically reduces it's funding from the likes of short-term creditors or suppliers. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

Our Take On Watches of Switzerland Group's ROCE

To sum it up, Watches of Switzerland Group has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a staggering 274% to shareholders over the last year, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

On a final note, we've found 2 warning signs for Watches of Switzerland Group that we think you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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