Has Worth Peripherals (NSE:WORTH) Got What It Takes To Become A Multi-Bagger?

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Worth Peripherals (NSE:WORTH) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding 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 Worth Peripherals, this is the formula:

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

0.15 = ₹205m ÷ (₹1.5b - ₹163m) (Based on the trailing twelve months to September 2020).

So, Worth Peripherals has an ROCE of 15%. In absolute terms, that's a satisfactory return, but compared to the Packaging industry average of 12% it's much better.

See our latest analysis for Worth Peripherals

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Worth Peripherals, check out these free graphs here.

What Does the ROCE Trend For Worth Peripherals Tell Us?

When we looked at the ROCE trend at Worth Peripherals, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 15% from 24% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a related note, Worth Peripherals has decreased its current liabilities to 11% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

What We Can Learn From Worth Peripherals' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Worth Peripherals is reinvesting for growth and has higher sales as a result. And there could be an opportunity here if other metrics look good too, because the stock has declined 44% in the last three years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Like most companies, Worth Peripherals does come with some risks, and we've found 3 warning signs that you should be aware of.

While Worth Peripherals 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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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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