Shareholders Would Enjoy A Repeat Of Wonder Electricals' (NSE:WEL) Recent Growth In Returns

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, the ROCE of Wonder Electricals (NSE:WEL) looks great, so lets see what the trend can tell us.

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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. The formula for this calculation on Wonder Electricals is:

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

0.29 = ₹283m ÷ (₹2.7b - ₹1.8b) (Based on the trailing twelve months to December 2024).

Thus, Wonder Electricals has an ROCE of 29%. That's a fantastic return and not only that, it outpaces the average of 14% earned by companies in a similar industry.

View our latest analysis for Wonder Electricals

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

So How Is Wonder Electricals' ROCE Trending?

Wonder Electricals is displaying some positive trends. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 29%. Basically the business is earning more per dollar of capital invested and in addition to that, 195% more capital is being employed now too. So we're very much inspired by what we're seeing at Wonder Electricals thanks to its ability to profitably reinvest capital.

One more thing to note, Wonder Electricals has decreased current liabilities to 64% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. This tells us that Wonder Electricals has grown its returns without a reliance on increasing their current liabilities, which we're very happy with. Nevertheless, there are some potential risks the company is bearing with current liabilities that high, so just keep that in mind.

In Conclusion...

All in all, it's terrific to see that Wonder Electricals is reaping the rewards from prior investments and is growing its capital base. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

One more thing to note, we've identified 1 warning sign with Wonder Electricals and understanding it should be part of your investment process.

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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.