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If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Wolftank Group (ETR:WAH) 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?
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. Analysts use this formula to calculate it for Wolftank Group:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.065 = €5.3m ÷ (€116m - €34m) (Based on the trailing twelve months to June 2024).
Therefore, Wolftank Group has an ROCE of 6.5%. In absolute terms, that's a low return but it's around the Commercial Services industry average of 7.7%.
See our latest analysis for Wolftank Group
In the above chart we have measured Wolftank Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Wolftank Group .
So How Is Wolftank Group's ROCE Trending?
We weren't thrilled with the trend because Wolftank Group's ROCE has reduced by 46% over the last five years, while the business employed 601% more capital. That being said, Wolftank Group raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Wolftank Group might not have received a full period of earnings contribution from it.
On a related note, Wolftank Group has decreased its current liabilities to 29% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.
The Bottom Line
In summary, despite lower returns in the short term, we're encouraged to see that Wolftank Group is reinvesting for growth and has higher sales as a result. These growth trends haven't led to growth returns though, since the stock has fallen 34% over the last three years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.