Werth-Holz (WSE:WHH) Could Be Struggling To Allocate Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. However, after investigating Werth-Holz (WSE:WHH), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What Is It?

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 Werth-Holz is:

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

0.02 = zł873k ÷ (zł60m - zł17m) (Based on the trailing twelve months to June 2024).

So, Werth-Holz has an ROCE of 2.0%. In absolute terms, that's a low return and it also under-performs the Leisure industry average of 19%.

See our latest analysis for Werth-Holz

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

So How Is Werth-Holz's ROCE Trending?

In terms of Werth-Holz's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 4.7% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, Werth-Holz has done well to pay down its current liabilities to 28% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

What We Can Learn From Werth-Holz's ROCE

While returns have fallen for Werth-Holz in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And long term investors must be optimistic going forward because the stock has returned a huge 114% to shareholders in the last five years. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

Werth-Holz does have some risks though, and we've spotted 4 warning signs for Werth-Holz 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.