U.S. markets closed
  • S&P 500

    4,471.37
    +33.11 (+0.75%)
     
  • Dow 30

    35,294.76
    +382.20 (+1.09%)
     
  • Nasdaq

    14,897.34
    +73.91 (+0.50%)
     
  • Russell 2000

    2,265.65
    -8.52 (-0.37%)
     
  • Crude Oil

    82.66
    +1.35 (+1.66%)
     
  • Gold

    1,768.10
    -29.80 (-1.66%)
     
  • Silver

    23.35
    -0.13 (-0.54%)
     
  • EUR/USD

    1.1606
    +0.0005 (+0.05%)
     
  • 10-Yr Bond

    1.5760
    +0.0570 (+3.75%)
     
  • GBP/USD

    1.3751
    +0.0074 (+0.54%)
     
  • USD/JPY

    114.2000
    +0.5230 (+0.46%)
     
  • BTC-USD

    60,736.53
    -991.87 (-1.61%)
     
  • CMC Crypto 200

    1,464.06
    +57.32 (+4.07%)
     
  • FTSE 100

    7,234.03
    +26.32 (+0.37%)
     
  • Nikkei 225

    29,068.63
    +517.70 (+1.81%)
     

Wagners Holding (ASX:WGN) May Have Issues Allocating Its Capital

  • Oops!
    Something went wrong.
    Please try again later.
·2 min read
In this article:
  • Oops!
    Something went wrong.
    Please try again later.

There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Wagners Holding (ASX:WGN), we don't think it's current trends fit the mold of a multi-bagger.

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. The formula for this calculation on Wagners Holding is:

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

0.082 = AU$22m ÷ (AU$342m - AU$72m) (Based on the trailing twelve months to June 2021).

So, Wagners Holding has an ROCE of 8.2%. On its own that's a low return on capital but it's in line with the industry's average returns of 8.1%.

View our latest analysis for Wagners Holding

roce
roce

Above you can see how the current ROCE for Wagners Holding compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Wagners Holding doesn't inspire confidence. To be more specific, ROCE has fallen from 30% over the last three years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

In Conclusion...

In summary, despite lower returns in the short term, we're encouraged to see that Wagners Holding is reinvesting for growth and has higher sales as a result. However, despite the promising trends, the stock has fallen 56% over the last three years, so there might be an opportunity here for astute investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

Wagners Holding does have some risks, we noticed 2 warning signs (and 1 which shouldn't be ignored) we think you should know about.

While Wagners Holding may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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.

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