Winsome Resources (ASX:WR1) Shareholders Will Want The ROCE Trajectory To Continue
If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. Speaking of which, we noticed some great changes in Winsome Resources' (ASX:WR1) returns on capital, so let's have a look.
Return On Capital Employed (ROCE): What Is It?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Winsome Resources, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.02 = AU$1.8m ÷ (AU$112m - AU$19m) (Based on the trailing twelve months to December 2023).
Therefore, Winsome Resources has an ROCE of 2.0%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 11%.
View our latest analysis for Winsome Resources
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Winsome Resources.
What Does the ROCE Trend For Winsome Resources Tell Us?
Winsome Resources has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses one year ago, but now it's earning 2.0% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Winsome Resources is utilizing 260% more capital than it was one year ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.
The Bottom Line On Winsome Resources' ROCE
Long story short, we're delighted to see that Winsome Resources' reinvestment activities have paid off and the company is now profitable. And since the stock has fallen 35% over the last year, there might be an opportunity here. That being the case, research into the company's current valuation metrics and future prospects seems fitting.
One more thing, we've spotted 2 warning signs facing Winsome Resources that you might find interesting.
While Winsome Resources isn't earning the highest return, check out this free list of companies that are 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.
