There Are Reasons To Feel Uneasy About Wendt (India)'s (NSE:WENDT) Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. However, after investigating Wendt (India) (NSE:WENDT), we don't think it's current trends fit the mold of a multi-bagger.

What is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Wendt (India), this is the formula:

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

0.041 = ₹57m ÷ (₹1.8b - ₹387m) (Based on the trailing twelve months to December 2020).

Thus, Wendt (India) has an ROCE of 4.1%. Ultimately, that's a low return and it under-performs the Machinery industry average of 11%.

See our latest analysis for Wendt (India)

Historical performance is a great place to start when researching a stock so above you can see the gauge for Wendt (India)'s ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Wendt (India), check out these free graphs here.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Wendt (India) doesn't inspire confidence. Around five years ago the returns on capital were 14%, but since then they've fallen to 4.1%. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

Our Take On Wendt (India)'s ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Wendt (India) have fallen, meanwhile the business is employing more capital than it was five years ago. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 93% return. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

One final note, you should learn about the 4 warning signs we've spotted with Wendt (India) (including 1 which shouldn't be ignored) .

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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This article by Simply Wall St is general in nature. 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.
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