Returns On Capital At Wescoal Holdings (JSE:WSL) Paint An Interesting Picture

There are a few key trends to look for if we want to identify the next multi-bagger. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at Wescoal Holdings (JSE:WSL) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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 Wescoal Holdings, this is the formula:

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

0.015 = R45m ÷ (R4.1b - R1.0b) (Based on the trailing twelve months to September 2020).

So, Wescoal Holdings has an ROCE of 1.5%. In absolute terms, that's a low return and it also under-performs the Trade Distributors industry average of 11%.

See our latest analysis for Wescoal Holdings

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'd like to look at how Wescoal Holdings has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Wescoal Holdings Tell Us?

When we looked at the ROCE trend at Wescoal Holdings, we didn't gain much confidence. To be more specific, ROCE has fallen from 3.4% over the last five years. 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.

On a related note, Wescoal Holdings has decreased its current liabilities to 25% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

Our Take On Wescoal Holdings' ROCE

To conclude, we've found that Wescoal Holdings is reinvesting in the business, but returns have been falling. Unsurprisingly, the stock has only gained 5.1% over the last five years, which potentially indicates that investors are accounting for this going forward. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

One final note, you should learn about the 4 warning signs we've spotted with Wescoal Holdings (including 2 which is are a bit concerning) .

While Wescoal Holdings 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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