Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at TheWorks.co.uk (LON:WRKS), it didn't seem to tick all of these boxes.
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 TheWorks.co.uk, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.10 = UK£9.3m ÷ (UK£188m - UK£95m) (Based on the trailing twelve months to October 2022).
So, TheWorks.co.uk has an ROCE of 10.0%. On its own, that's a low figure but it's around the 12% average generated by the Specialty Retail industry.
Above you can see how the current ROCE for TheWorks.co.uk 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 Does the ROCE Trend For TheWorks.co.uk Tell Us?
On the surface, the trend of ROCE at TheWorks.co.uk doesn't inspire confidence. Over the last five years, returns on capital have decreased to 10.0% from 19% five years ago. 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.
On a side note, TheWorks.co.uk's current liabilities are still rather high at 51% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.
The Bottom Line On TheWorks.co.uk's ROCE
While returns have fallen for TheWorks.co.uk in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. But since the stock has dived 79% in the last five years, there could be other drivers that are influencing the business' outlook. Therefore, we'd suggest researching the stock further to uncover more about the business.
One more thing to note, we've identified 5 warning signs with TheWorks.co.uk and understanding these should be part of your investment process.
While TheWorks.co.uk 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.