Wickes Group (LON:WIX) Shareholders Will Want The ROCE Trajectory To Continue
There are a few key trends to look for if we want to identify the next multi-bagger. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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 Wickes Group (LON:WIX) and its trend of ROCE, we really liked what we saw.
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 Wickes Group, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.14 = UK£111m ÷ (UK£1.2b - UK£401m) (Based on the trailing twelve months to July 2022).
Thus, Wickes Group has an ROCE of 14%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Specialty Retail industry average of 13%.
View our latest analysis for Wickes Group
In the above chart we have measured Wickes Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Wickes Group here for free.
What Can We Tell From Wickes Group's ROCE Trend?
Wickes Group has not disappointed in regards to ROCE growth. The figures show that over the last three years, returns on capital have grown by 70%. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. Interestingly, the business may be becoming more efficient because it's applying 24% less capital than it was three years ago. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.
Our Take On Wickes Group's ROCE
In the end, Wickes Group has proven it's capital allocation skills are good with those higher returns from less amount of capital. And since the stock has fallen 31% over the last year, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.
Like most companies, Wickes Group does come with some risks, and we've found 2 warning signs that you should be aware of.
While Wickes Group 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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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