Returns On Capital At WD-40 (NASDAQ:WDFC) Paint A Concerning Picture

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. So while WD-40 (NASDAQ:WDFC) has a high ROCE right now, lets see what we can decipher from how returns are changing.

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. To calculate this metric for WD-40, this is the formula:

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

0.28 = US$96m ÷ (US$449m - US$104m) (Based on the trailing twelve months to August 2024).

Therefore, WD-40 has an ROCE of 28%. In absolute terms that's a great return and it's even better than the Household Products industry average of 17%.

See our latest analysis for WD-40

Above you can see how the current ROCE for WD-40 compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for WD-40 .

How Are Returns Trending?

When we looked at the ROCE trend at WD-40, we didn't gain much confidence. While it's comforting that the ROCE is high, five years ago it was 36%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line On WD-40's ROCE

Bringing it all together, while we're somewhat encouraged by WD-40's reinvestment in its own business, we're aware that returns are shrinking. Although the market must be expecting these trends to improve because the stock has gained 60% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

WD-40 could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for WDFC on our platform quite valuable.

WD-40 is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.