If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Amongst other things, we’ll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company’s amount of capital employed. If you see this, it typically means it’s a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don’t think Wynnstay Group (LON:WYN) has the makings of a multi-bagger going forward, but let’s have a look at why that may be.
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. To calculate this metric for Wynnstay Group, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.051 = UK£7.8m ÷ (UK£238m – UK£86m) (Based on the trailing twelve months to April 2024).
Thus, Wynnstay Group has an ROCE of 5.1%. In absolute terms, that’s a low return and it also under-performs the Food industry average of 13%.
Check out our latest analysis for Wynnstay Group
Above you can see how the current ROCE for Wynnstay Group compares to its prior returns on capital, but there’s only so much you can tell from the past. If you’d like, you can check out the forecasts from the analysts covering Wynnstay Group for free.
In terms of Wynnstay Group’s historical ROCE movements, the trend isn’t fantastic. To be more specific, ROCE has fallen from 8.9% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it’s actually producing a lower return – “less bang for their buck” per se.
In summary, we’re somewhat concerned by Wynnstay Group’s diminishing returns on increasing amounts of capital. Despite the concerning underlying trends, the stock has actually gained 26% over the last five years, so it might be that the investors are expecting the trends to reverse. Either way, we aren’t huge fans of the current trends and so with that we think you might find better investments elsewhere.
On a final note, we’ve found 2 warning signs for Wynnstay Group that we think you should be aware of.