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Our Take On The Returns On Capital At WiseTech Global (ASX:WTC)

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·3 min read
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What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think WiseTech Global (ASX:WTC) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding 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. To calculate this metric for WiseTech Global, this is the formula:

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

0.073 = AU$82m ÷ (AU$1.3b - AU$157m) (Based on the trailing twelve months to June 2020).

Therefore, WiseTech Global has an ROCE of 7.3%. In absolute terms, that's a low return and it also under-performs the Software industry average of 13%.

See our latest analysis for WiseTech Global

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Above you can see how the current ROCE for WiseTech Global compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for WiseTech Global.

So How Is WiseTech Global's ROCE Trending?

When we looked at the ROCE trend at WiseTech Global, we didn't gain much confidence. To be more specific, ROCE has fallen from 13% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

What We Can Learn From WiseTech Global's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for WiseTech Global. And long term investors must be optimistic going forward because the stock has returned a huge 103% to shareholders in the last three years. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

WiseTech Global does have some risks though, and we've spotted 2 warning signs for WiseTech Global that you might be interested in.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.