The Returns At Wielton (WSE:WLT) Provide Us With Signs Of What's To Come

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Wielton (WSE:WLT) and its ROCE trend, we weren't exactly thrilled.

What is 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. The formula for this calculation on Wielton is:

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

0.049 = zł39m ÷ (zł1.4b - zł661m) (Based on the trailing twelve months to September 2020).

Therefore, Wielton has an ROCE of 4.9%. Ultimately, that's a low return and it under-performs the Machinery industry average of 7.2%.

Check out our latest analysis for Wielton

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

What Does the ROCE Trend For Wielton Tell Us?

When we looked at the ROCE trend at Wielton, we didn't gain much confidence. Around five years ago the returns on capital were 6.4%, but since then they've fallen to 4.9%. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a separate but related note, it's important to know that Wielton has a current liabilities to total assets ratio of 46%, 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.

In Conclusion...

We're a bit apprehensive about Wielton because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Yet despite these concerning fundamentals, the stock has performed strongly with a 46% return over the last five years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

On a separate note, we've found 4 warning signs for Wielton you'll probably want to know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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