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If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Warehouse Group (NZSE:WHS) and its ROCE trend, we weren't exactly thrilled.
Return On Capital Employed (ROCE): What Is It?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Warehouse Group:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.09 = NZ$102m ÷ (NZ$1.8b - NZ$639m) (Based on the trailing twelve months to July 2023).
Thus, Warehouse Group has an ROCE of 9.0%. On its own, that's a low figure but it's around the 11% average generated by the Multiline Retail industry.
View our latest analysis for Warehouse Group
In the above chart we have measured Warehouse 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 Warehouse Group .
What Does the ROCE Trend For Warehouse Group Tell Us?
In terms of Warehouse Group's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 14% over the last five years. However it looks like Warehouse Group might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
Our Take On Warehouse Group's ROCE
To conclude, we've found that Warehouse Group is reinvesting in the business, but returns have been falling. Since the stock has declined 13% over the last five years, investors may not be too optimistic on this trend improving either. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.
On a final note, we've found 3 warning signs for Warehouse Group that we think you should be aware of.