Returns On Capital Tell Us A Lot About Wasko (WSE:WAS)

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. So after glancing at the trends within Wasko (WSE:WAS), we weren't too hopeful.

Return On Capital Employed (ROCE): What is it?

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. The formula for this calculation on Wasko is:

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

0.0032 = zł774k ÷ (zł376m - zł131m) (Based on the trailing twelve months to September 2020).

So, Wasko has an ROCE of 0.3%. Ultimately, that's a low return and it under-performs the Software industry average of 23%.

View our latest analysis for Wasko

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Wasko's past further, check out this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

There is reason to be cautious about Wasko, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 16% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Wasko becoming one if things continue as they have.

The Key Takeaway

In summary, it's unfortunate that Wasko is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 26% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Wasko does have some risks, we noticed 4 warning signs (and 1 which is a bit concerning) we think you should know about.

While Wasko 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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