Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. With that in mind, we've noticed some promising trends at Westlife Foodworld (NSE:WESTLIFE) so let's look a bit deeper.
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. To calculate this metric for Westlife Foodworld, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.15 = ₹2.2b ÷ (₹19b - ₹4.4b) (Based on the trailing twelve months to December 2022).
Therefore, Westlife Foodworld has an ROCE of 15%. In absolute terms, that's a satisfactory return, but compared to the Hospitality industry average of 10% it's much better.
Check out our latest analysis for Westlife Foodworld
In the above chart we have measured Westlife Foodworld'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 Westlife Foodworld here for free.
The Trend Of ROCE
Westlife Foodworld is displaying some positive trends. The data shows that returns on capital have increased substantially over the last five years to 15%. The amount of capital employed has increased too, by 184%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.
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.
The Bottom Line On Westlife Foodworld's ROCE
To sum it up, Westlife Foodworld 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 solid 51% to shareholders over the last three years, it's fair to say investors are beginning to recognize these changes. In light of that, we think it's worth looking further into this stock because if Westlife Foodworld can keep these trends up, it could have a bright future ahead.
Westlife Foodworld does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those makes us a bit uncomfortable...
While Westlife Foodworld 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.
About NSEI:WESTLIFE
Westlife Foodworld
Through its subsidiary, Hardcastle Restaurants Private Limited, owns and operates a chain of McDonald's restaurants in Western and Southern India.
Reasonable growth potential low.