TheWorks.co.uk (LON:WRKS) Could Become A Multi-Bagger

There are a few key trends to look for if we want to identify the next multi-bagger. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at the ROCE trend of TheWorks.co.uk (LON:WRKS) we really liked what we saw.

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)

0.23 = UK£14m ÷ (UK£147m - UK£87m) (Based on the trailing twelve months to October 2023).

Therefore, TheWorks.co.uk has an ROCE of 23%. In absolute terms that's a great return and it's even better than the Specialty Retail industry average of 14%.

View our latest analysis for TheWorks.co.uk

roce

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're interested, you can view the analysts predictions in our free analyst report for TheWorks.co.uk .

So How Is TheWorks.co.uk's ROCE Trending?

The trends we've noticed at TheWorks.co.uk are quite reassuring. The data shows that returns on capital have increased substantially over the last five years to 23%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 96%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

Another thing to note, TheWorks.co.uk has a high ratio of current liabilities to total assets of 60%. 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 summary, it's great to see that TheWorks.co.uk can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Astute investors may have an opportunity here because the stock has declined 57% in the last five years. So researching this company further and determining whether or not these trends will continue seems justified.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for TheWorks.co.uk (of which 1 is significant!) that you should know about.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com