Wilh. Wilhelmsen Holding (OB:WWI) Shareholders Will Want The ROCE Trajectory To Continue

To find a multi-bagger stock, what are the underlying trends we should look for in a business? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at Wilh. Wilhelmsen Holding (OB:WWI) and its trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What is it?

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. Analysts use this formula to calculate it for Wilh. Wilhelmsen Holding:

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

0.027 = US$71m ÷ (US$3.4b - US$821m) (Based on the trailing twelve months to December 2021).

So, Wilh. Wilhelmsen Holding has an ROCE of 2.7%. In absolute terms, that's a low return and it also under-performs the Shipping industry average of 6.4%.

See our latest analysis for Wilh. Wilhelmsen Holding

In the above chart we have measured Wilh. Wilhelmsen Holding's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Wilh. Wilhelmsen Holding.

What Does the ROCE Trend For Wilh. Wilhelmsen Holding Tell Us?

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. We found that the returns on capital employed over the last five years have risen by 257%. The company is now earning US$0.03 per dollar of capital employed. Speaking of capital employed, the company is actually utilizing 38% less than it was five years ago, which can be indicative of a business that's improving its efficiency. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 24% of the business, which is more than it was five years ago. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.

What We Can Learn From Wilh. Wilhelmsen Holding's ROCE

In a nutshell, we're pleased to see that Wilh. Wilhelmsen Holding has been able to generate higher returns from less capital. Since the stock has only returned 16% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So with that in mind, we think the stock deserves further research.

Wilh. Wilhelmsen Holding does have some risks though, and we've spotted 3 warning signs for Wilh. Wilhelmsen Holding that you might be interested in.

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.