Returns Are Gaining Momentum At Websol Energy System (NSE:WEBELSOLAR)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at Websol Energy System (NSE:WEBELSOLAR) and its trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Websol Energy System, this is the formula:

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

0.051 = ₹115m ÷ (₹2.8b - ₹575m) (Based on the trailing twelve months to September 2021).

Thus, Websol Energy System has an ROCE of 5.1%. On its own, that's a low figure but it's around the 5.7% average generated by the Semiconductor industry.

View our latest analysis for Websol Energy System

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

What Can We Tell From Websol Energy System's ROCE Trend?

The fact that Websol Energy System is now generating some pre-tax profits from its prior investments is very encouraging. About five years ago the company was generating losses but things have turned around because it's now earning 5.1% on its capital. In addition to that, Websol Energy System is employing 368% more capital than previously which is expected of a company that's trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

On a related note, the company's ratio of current liabilities to total assets has decreased to 20%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

What We Can Learn From Websol Energy System's ROCE

Long story short, we're delighted to see that Websol Energy System's reinvestment activities have paid off and the company is now profitable. And a remarkable 174% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Websol Energy System can keep these trends up, it could have a bright future ahead.

Websol Energy System does have some risks, we noticed 4 warning signs (and 1 which shouldn't be ignored) we think you should know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.