JWW Invest's (WSE:JWW) Returns On Capital Not Reflecting Well On The Business

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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think JWW Invest (WSE:JWW) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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Understanding Return On Capital Employed (ROCE)

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 JWW Invest:

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

0.17 = zł6.9m ÷ (zł75m - zł34m) (Based on the trailing twelve months to September 2024).

Thus, JWW Invest has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 13% generated by the Commercial Services industry.

Check out our latest analysis for JWW Invest

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

How Are Returns Trending?

When we looked at the ROCE trend at JWW Invest, we didn't gain much confidence. Around five years ago the returns on capital were 22%, but since then they've fallen to 17%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, JWW Invest's current liabilities are still rather high at 46% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On JWW Invest's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that JWW Invest is reinvesting for growth and has higher sales as a result. In light of this, the stock has only gained 34% over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

If you want to know some of the risks facing JWW Invest we've found 2 warning signs (1 doesn't sit too well with us!) that you should be aware of before investing here.

While JWW Invest 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.