Worth Peripherals (NSE:WORTH) Could Be Struggling To Allocate Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. Having said that, from a first glance at Worth Peripherals (NSE:WORTH) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

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. 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)

0.16 = ₹234m ÷ (₹1.8b - ₹357m) (Based on the trailing twelve months to June 2022).

So, Worth Peripherals has an ROCE of 16%. That's a relatively normal return on capital, and it's around the 15% generated by the Packaging industry.

See our latest analysis for Worth Peripherals

Historical performance is a great place to start when researching a stock so above you can see the gauge for Worth Peripherals' ROCE against it's prior returns. If you'd like to look at how Worth Peripherals has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Worth Peripherals' ROCE Trending?

On the surface, the trend of ROCE at Worth Peripherals doesn't inspire confidence. Over the last five years, returns on capital have decreased to 16% from 23% 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.

The Bottom Line

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 the stock has done incredibly well with a 170% return over the last three years, so long term investors are no doubt ecstatic with that result. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

One more thing, we've spotted 2 warning signs facing Worth Peripherals that you might find interesting.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.