Yahoo Finance Warehouse Group's (NZSE:WHS) Returns Have Hit A Wall
If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. That's why when we briefly looked at Warehouse Group's (NZSE:WHS) ROCE trend, we were pretty happy with what we saw.
What is Return On Capital Employed (ROCE)?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Warehouse Group:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.14 = NZ$180m ÷ (NZ$2.0b - NZ$697m) (Based on the trailing twelve months to January 2021).
Thus, Warehouse Group has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Multiline Retail industry average of 6.6% it's much better.
View our latest analysis for Warehouse Group
In the above chart we have measured Warehouse Group'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 Warehouse Group here for free.
What Can We Tell From Warehouse Group's ROCE Trend?
The trend of ROCE doesn't stand out much, but returns on a whole are decent. The company has employed 52% more capital in the last five years, and the returns on that capital have remained stable at 14%. 14% is a pretty standard return, and it provides some comfort knowing that Warehouse Group has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.
The Key Takeaway
The main thing to remember is that Warehouse Group has proven its ability to continually reinvest at respectable rates of return. And the stock has followed suit returning a meaningful 88% to shareholders 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.
If you want to continue researching Warehouse Group, you might be interested to know about the 2 warning signs that our analysis has discovered.
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.
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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