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What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So, when we ran our eye over Wayside Technology Group's (NASDAQ:WSTG) trend of ROCE, we really liked what we saw.
Return On Capital Employed (ROCE): What is it?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Wayside Technology Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.21 = US$11m ÷ (US$172m - US$119m) (Based on the trailing twelve months to September 2021).
Therefore, Wayside Technology Group has an ROCE of 21%. In absolute terms that's a great return and it's even better than the Electronic industry average of 10.0%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Wayside Technology Group's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Wayside Technology Group, check out these free graphs here.
What The Trend Of ROCE Can Tell Us
It's hard not to be impressed by Wayside Technology Group's returns on capital. The company has employed 40% more capital in the last five years, and the returns on that capital have remained stable at 21%. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. You'll see this when looking at well operated businesses or favorable business models.
On a side note, Wayside Technology Group's current liabilities are still rather high at 69% 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.
Our Take On Wayside Technology Group's ROCE
In short, we'd argue Wayside Technology Group 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 111% return they've received over the last five years. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.
While Wayside Technology Group looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether WSTG is currently trading for a fair price.
If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.
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.
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