What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we’ll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. That’s why when we briefly looked at WW International’s (NASDAQ:WW) ROCE trend, we were very happy with what we saw.
What is Return On Capital Employed (ROCE)?
If you haven’t worked with ROCE before, it measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on WW International is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.26 = US$284m ÷ (US$1.5b – US$371m) (Based on the trailing twelve months to June 2020).
Thus, WW International has an ROCE of 26%. That’s a fantastic return and not only that, it outpaces the average of 8.7% earned by companies in a similar industry.
View our latest analysis for WW International
Above you can see how the current ROCE for WW International 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.
The Trend Of ROCE
It’s hard not to be impressed by WW International’s returns on capital. Over the past five years, ROCE has remained relatively flat at around 26% and the business has deployed 25% more capital into its operations. Now considering ROCE is an attractive 26%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. You’ll see this when looking at well operated businesses or favorable business models.
In short, we’d argue WW International has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. And long term investors would be thrilled with the 217% return they’ve received over the last five years. So even though the stock might be more “expensive” than it was before, we think the strong fundamentals warrant this stock for further research.
Since virtually every company faces some risks, it’s worth knowing what they are, and we’ve spotted 4 warning signs for WW International (of which 1 is a bit unpleasant!) 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.
This article by Simply Wall St is general in nature. 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.
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Christine founded Sports Grind Entertainment with an aim to bring relevant and unaltered Sports news to the general public with a specific view point for each story catered by the team. She is a proficient journalist who holds a reputable portfolio with proficiency in content analysis and research.