This analysis is intended to introduce important early concepts to people who are starting to invest and want a simplistic look at the return on WestRock Company (NYSE:WRK) stock.
Purchasing WestRock gives you an ownership stake in the company. Your equity share is granted in return for the capital provided to the business to operate, and in order for an investment to be successful the business has to create earnings from the funds that make up this capital. You need to pay attention to this because your return on investment is linked to dividends and internal investments to improve the business, which can only occur if the company is expected to produce adequate earnings with the capital that has been provided. Therefore, looking at how efficiently WestRock is able to use capital to create earnings will help us understand your potential return. Investors use many different metrics but the analysis below focuses on return on capital employed (ROCE). Let’s take a look at what it can tell us.
Calculating Return On Capital Employed for WRK
You only have a finite amount of capital to invest, so there are only so many companies that you can add to your portfolio. Therefore all else aside, your investment in a certain company represents a vote of confidence that the money used to buy the stock will grow larger than if invested elsewhere. So the business’ ability to grow the size of your capital is very important and can be assessed by comparing the return on capital you can get on your investment with a hurdle rate that depends on the other return possibilities you can identify. A good metric to use is return on capital employed (ROCE), which helps us gauge how much income can be created from the funds needed to operate the business. This metric will tell us if WestRock is good at growing investor capital. WRK’s ROCE is calculated below:
ROCE Calculation for WRK
Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)
Capital Employed = (Total Assets – Current Liabilities)
∴ ROCE = US$1.25b ÷ (US$25.14b – US$2.97b) = 5.6%
The calculation above shows that WRK’s earnings were 5.6% of capital employed. A good ROCE hurdle you should aim for in your investments is 15%, which WRK has failed to reach, meaning the company creates an unimpressive amount of earnings from capital employed.
What is causing this?
The underperforming ROCE is not ideal for WestRock investors if the company is unable to turn things around. But if the underlying variables (earnings and capital employed) improve, WRK’s ROCE may increase, in which case your portfolio could benefit from holding the company. Therefore, investors need to understand the trend of the inputs in the formula above, so that they can see if there is an opportunity to invest. Three years ago, WRK’s ROCE was 9.8%, which means the company’s capital returns have worsened. Conversely, the movement in the earnings variable shows a jump from US$943.1m to US$1.25b albeit capital employed has grown by a relatively larger volume due to an increase in total assets , which means that although earnings have increased, WRK requires more capital to produce each $1 of earnings.
WestRock’s ROCE has decreased in the recent past and is currently at a level that makes us question whether the company is capable of providing a suitable return on investment. Before making any decisions, ROCE does not tell the whole picture so you need to pay attention to other fundamentals like future prospects and valuation. WestRock’s fundamentals can be explored with the links I’ve provided below if you are interested, otherwise you can start looking at other high-performing stocks.
- Future Outlook: What are well-informed industry analysts predicting for WRK’s future growth? Take a look at our free research report of analyst consensus for WRK’s outlook.
- Valuation: What is WRK worth today? Despite the unattractive ROCE, is the outlook correctly factored in to the price? The intrinsic value infographic in our free research report helps visualize whether WRK is currently undervalued by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at email@example.com.