If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. So when we looked at the ROCE trend of Wilmington (LON:WIL) we really liked what we saw.
What Is Return On Capital Employed (ROCE)?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Wilmington:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.23 = UK£19m ÷ (UK£135m - UK£53m) (Based on the trailing twelve months to December 2022).
Thus, Wilmington has an ROCE of 23%. In absolute terms that's a great return and it's even better than the Professional Services industry average of 16%.
Above you can see how the current ROCE for Wilmington 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 Wilmington.
So How Is Wilmington's ROCE Trending?
You'd find it hard not to be impressed with the ROCE trend at Wilmington. The data shows that returns on capital have increased by 74% over the trailing five years. The company is now earning UK£0.2 per dollar of capital employed. Speaking of capital employed, the company is actually utilizing 23% less than it was five years ago, which can be indicative of a business that's improving its efficiency. Wilmington may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.
In a nutshell, we're pleased to see that Wilmington has been able to generate higher returns from less capital. And with a respectable 94% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
Wilmington does have some risks though, and we've spotted 1 warning sign for Wilmington that you might be interested in.
High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.