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If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. That's why when we briefly looked at Wolftank Group's (ETR:WAH) ROCE trend, we were pretty happy with what we saw.
What Is Return On Capital Employed (ROCE)?
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. The formula for this calculation on Wolftank Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.12 = €5.3m ÷ (€116m - €70m) (Based on the trailing twelve months to June 2024).
Therefore, Wolftank Group has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 8.1% generated by the Commercial Services industry.
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 .
What Can We Tell From Wolftank Group's ROCE Trend?
While the returns on capital are good, they haven't moved much. The company has employed 291% more capital in the last five years, and the returns on that capital have remained stable at 12%. Since 12% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.
Another thing to note, Wolftank Group has a high ratio of current liabilities to total assets of 61%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.
The Bottom Line On Wolftank Group's ROCE
To sum it up, Wolftank Group has simply been reinvesting capital steadily, at those decent rates of return. In light of this, the stock has only gained 9.7% over the last five years for shareholders who have owned the stock in this period. So to determine if Wolftank Group is a multi-bagger going forward, we'd suggest digging deeper into the company's other fundamentals.