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There are a few key trends to look for if we are to identify the next multi-bagger. In a perfect world, we would like a business to invest more capital in their business, and ideally the returns from that capital increase as well. If you see this, it usually means it’s a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we have noticed some big changes in Westwing Group (ETR: WEW) capital returns, so let’s take a look.
Understanding Return on Capital Employed (ROCE)
For those who don’t know what ROCE is, it measures the amount of pre-tax profit a business can generate from the capital employed in its business. To calculate this metric for Westwing Group, here is the formula:
Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)
0.28 = € 43m ÷ (€ 256m – € 101m) (Based on the last twelve months up to June 2021).
Thereby, Westwing Group has a ROCE of 28%. This is a fantastic return and not only that, it exceeds the 10% average earned by companies in a similar industry.
See our latest analysis for Westwing Group
In the graph above, we measured Westwing Group’s past ROCE against its past performance, but the future is arguably more important. If you like, you can view the analysts’ forecasts covering Westwing Group here for free.
So what’s the Westwing Group’s ROCE trend?
We are delighted to see that Westwing Group is reaping the rewards of its investments and is now generating pre-tax profits. About three years ago the company was making losses, but things have changed as it now earns 28% on its equity. And unsurprisingly, like most companies trying to break into the dark, Westwing Group is using 1,334% more equity than three years ago. We like this trend because it tells us that the company has profitable reinvestment opportunities, and if it keeps moving forward it can lead to multi-bagger performance.
In another part of our analysis, we noticed that the ratio of the company’s current liabilities to total assets decreased to 40%, which means overall that the company relies less on its suppliers or its short-term creditors to finance its operations. Shareholders would therefore be delighted if the growth in returns was primarily due to the underlying performance of the company.
The bottom line
To the delight of most shareholders, Westwing Group has now returned to profitability. Given that the stock has returned 112% to shareholders over the past year, it looks like investors are recognizing these changes. So, given that the stock has proven to have some promising trends, it is worth doing more research on the company to see if these trends are likely to continue.
Westwing Group does have some risks, however, and we have spotted 1 warning sign for Westwing Group that might interest you.
If you’d like to see other companies driving high returns, check out our free List of high yielding companies with strong balance sheets here.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
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