Returns On Capital Are Showing Encouraging Signs At Welspun Enterprises (NSE:WELENT)

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, we've noticed some promising trends at Welspun Enterprises (NSE:WELENT) so let's look a bit deeper.

Return On Capital Employed (ROCE): What is it?

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 Welspun Enterprises is:

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

0.047 = ₹1.5b ÷ (₹40b - ₹7.6b) (Based on the trailing twelve months to December 2020).

Thus, Welspun Enterprises has an ROCE of 4.7%. Ultimately, that's a low return and it under-performs the Construction industry average of 9.2%.

See our latest analysis for Welspun Enterprises

Historical performance is a great place to start when researching a stock so above you can see the gauge for Welspun Enterprises' ROCE against it's prior returns. If you're interested in investigating Welspun Enterprises' past further, check out this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

Welspun Enterprises has recently broken into profitability so their prior investments seem to be paying off. About five years ago the company was generating losses but things have turned around because it's now earning 4.7% on its capital. Not only that, but the company is utilizing 89% more capital than before, but that's to be expected from a company trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

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. The current liabilities has increased to 19% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.

What We Can Learn From Welspun Enterprises' ROCE

Long story short, we're delighted to see that Welspun Enterprises' reinvestment activities have paid off and the company is now profitable. And a remarkable 128% total return over the last five years tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

Welspun Enterprises does have some risks, we noticed 4 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

While Welspun Enterprises 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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