Yahoo Finance TheWorks.co.uk (LON:WRKS) Has Some Way To Go To Become A Multi-Bagger
What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. With that in mind, the ROCE of TheWorks.co.uk (LON:WRKS) looks decent, right now, so lets see what the trend of returns can tell us.
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. Analysts use this formula to calculate it for TheWorks.co.uk:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.18 = UK£14m ÷ (UK£137m - UK£60m) (Based on the trailing twelve months to April 2023).
Therefore, TheWorks.co.uk has an ROCE of 18%. In absolute terms, that's a satisfactory return, but compared to the Specialty Retail industry average of 14% it's much better.
View our latest analysis for TheWorks.co.uk
In the above chart we have measured TheWorks.co.uk'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 TheWorks.co.uk here for free.
What Does the ROCE Trend For TheWorks.co.uk Tell Us?
The trend of ROCE doesn't stand out much, but returns on a whole are decent. The company has consistently earned 18% for the last five years, and the capital employed within the business has risen 99% in that time. 18% is a pretty standard return, and it provides some comfort knowing that TheWorks.co.uk has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.
On a side note, TheWorks.co.uk's current liabilities are still rather high at 43% 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.
What We Can Learn From TheWorks.co.uk's ROCE
In the end, TheWorks.co.uk has proven its ability to adequately reinvest capital at good rates of return. What's surprising though is that the stock has collapsed 76% over the last five years, so there might be other areas of the business hurting its prospects. That's why it's worth looking further into this stock because while these fundamentals look good, there could be other issues with the business.
One final note, you should learn about the 4 warning signs we've spotted with TheWorks.co.uk (including 1 which is potentially serious) .
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.
