Returns On Capital At Seco/Warwick (WSE:SWG) Have Hit The Brakes

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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. However, after briefly looking over the numbers, we don't think Seco/Warwick (WSE:SWG) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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 Seco/Warwick is:

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

0.11 = zł26m ÷ (zł490m - zł247m) (Based on the trailing twelve months to March 2022).

Therefore, Seco/Warwick has an ROCE of 11%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Machinery industry average of 10%.

View our latest analysis for Seco/Warwick

Historical performance is a great place to start when researching a stock so above you can see the gauge for Seco/Warwick's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Seco/Warwick, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

There hasn't been much to report for Seco/Warwick's returns and its level of capital employed because both metrics have been steady for the past five years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. With that in mind, unless investment picks up again in the future, we wouldn't expect Seco/Warwick to be a multi-bagger going forward.

On a separate but related note, it's important to know that Seco/Warwick has a current liabilities to total assets ratio of 50%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

What We Can Learn From Seco/Warwick's ROCE

We can conclude that in regards to Seco/Warwick's returns on capital employed and the trends, there isn't much change to report on. Since the stock has declined 28% over the last five years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Seco/Warwick has the makings of a multi-bagger.

One more thing, we've spotted 2 warning signs facing Seco/Warwick that you might find interesting.

While Seco/Warwick 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.