There Are Reasons To Feel Uneasy About Websolute's (BIT:WBS) Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. However, after investigating Websolute (BIT:WBS), we don't think it's current trends fit the mold of a multi-bagger.

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. Analysts use this formula to calculate it for Websolute:

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

0.015 = €175k ÷ (€18m - €6.5m) (Based on the trailing twelve months to December 2023).

Thus, Websolute has an ROCE of 1.5%. In absolute terms, that's a low return and it also under-performs the Interactive Media and Services industry average of 22%.

Check out our latest analysis for Websolute

Above you can see how the current ROCE for Websolute compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Websolute .

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Websolute doesn't inspire confidence. To be more specific, ROCE has fallen from 20% over the last five years. However it looks like Websolute might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line

To conclude, we've found that Websolute is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 27% in the last three years. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Websolute (of which 2 can't be ignored!) that you should know about.

While Websolute 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.