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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So on that note, Weng Fine Art (FRA:WFA) looks quite promising in regards to its trends of return on capital.
Understanding Return On Capital Employed (ROCE)
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 Weng Fine Art:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.16 = €4.8m ÷ (€33m - €2.6m) (Based on the trailing twelve months to June 2022).
Therefore, Weng Fine Art has an ROCE of 16%. On its own, that's a standard return, however it's much better than the 8.7% generated by the Specialty Retail industry.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Weng Fine Art's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Weng Fine Art, check out these free graphs here.
What Can We Tell From Weng Fine Art's ROCE Trend?
We like the trends that we're seeing from Weng Fine Art. Over the last five years, returns on capital employed have risen substantially to 16%. The amount of capital employed has increased too, by 39%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.
To sum it up, Weng Fine Art has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And with the stock having performed exceptionally well over the last three years, these patterns are being accounted for by investors. Therefore, we think it would be worth your time to check if these trends are going to continue.
One more thing: We've identified 3 warning signs with Weng Fine Art (at least 1 which is a bit unpleasant) , and understanding these would certainly be useful.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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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.
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