Explore Wellard's Fair Values from the Community and select yours

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. So when we looked at Wellard (ASX:WLD) and its trend of ROCE, we really liked what we saw.

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What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Wellard, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.075 = US$2.1m ÷ (US$33m - US$4.6m) (Based on the trailing twelve months to December 2024).

So, Wellard has an ROCE of 7.5%. In absolute terms, that's a low return but it's around the Food industry average of 9.0%.

Check out our latest analysis for Wellard

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're interested in investigating Wellard's past further, check out this free graph covering Wellard's past earnings, revenue and cash flow.

How Are Returns Trending?

Like most people, we're pleased that Wellard is now generating some pretax earnings. The company was generating losses five years ago, but now it's turned around, earning 7.5% which is no doubt a relief for some early shareholders. At first glance, it seems the business is getting more proficient at generating returns, because over the same period, the amount of capital employed has reduced by 30%. This could potentially mean that the company is selling some of its assets.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 14%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. This tells us that Wellard has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

In Conclusion...

In the end, Wellard has proven it's capital allocation skills are good with those higher returns from less amount of capital. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. Therefore, we think it would be worth your time to check if these trends are going to continue.

Wellard does have some risks, we noticed 2 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

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Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.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.