What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. However, after briefly looking over the numbers, we don't think Wawel (WSE:WWL) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
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. To calculate this metric for Wawel, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.10 = zł72m ÷ (zł799m - zł101m) (Based on the trailing twelve months to March 2021).
So, Wawel has an ROCE of 10%. That's a relatively normal return on capital, and it's around the 9.4% generated by the Food industry.
Above you can see how the current ROCE for Wawel compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Wawel.
So How Is Wawel's ROCE Trending?
On the surface, the trend of ROCE at Wawel doesn't inspire confidence. Over the last five years, returns on capital have decreased to 10% from 20% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.
Our Take On Wawel's ROCE
We're a bit apprehensive about Wawel because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Long term shareholders who've owned the stock over the last five years have experienced a 31% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.
On a final note, we've found 1 warning sign for Wawel that we think you should be aware of.
While Wawel isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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