Yahoo Finance WestStar Industrial (ASX:WSI) Will Want To Turn Around Its Return Trends
What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So while WestStar Industrial (ASX:WSI) has a high ROCE right now, lets see what we can decipher from how returns are changing.
Return On Capital Employed (ROCE): What Is It?
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. The formula for this calculation on WestStar Industrial is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.29 = AU$8.4m ÷ (AU$79m - AU$50m) (Based on the trailing twelve months to December 2022).
Thus, WestStar Industrial has an ROCE of 29%. In absolute terms that's a great return and it's even better than the Metals and Mining industry average of 10.0%.
See our latest analysis for WestStar Industrial
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of WestStar Industrial, check out these free graphs here.
So How Is WestStar Industrial's ROCE Trending?
On the surface, the trend of ROCE at WestStar Industrial doesn't inspire confidence. To be more specific, while the ROCE is still high, it's fallen from 48% where it was three years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
On a side note, WestStar Industrial has done well to pay down its current liabilities to 63% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE. Keep in mind 63% is still pretty high, so those risks are still somewhat prevalent.
The Bottom Line
In summary, despite lower returns in the short term, we're encouraged to see that WestStar Industrial is reinvesting for growth and has higher sales as a result. In light of this, the stock has only gained 13% over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.
On a separate note, we've found 2 warning signs for WestStar Industrial you'll probably want to 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.
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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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