To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. And in light of that, the trends we're seeing at Wilmington's (LON:WIL) look very promising so lets take a look.
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 Wilmington is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.23 = UK£19m ÷ (UK£135m - UK£53m) (Based on the trailing twelve months to December 2022).
Therefore, Wilmington has an ROCE of 23%. In absolute terms that's a great return and it's even better than the Professional Services industry average of 15%.
See our latest analysis for Wilmington
In the above chart we have measured Wilmington'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 Wilmington here for free.
What Does the ROCE Trend For Wilmington Tell Us?
Wilmington has not disappointed in regards to ROCE growth. The data shows that returns on capital have increased by 74% over the trailing five years. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. In regards to capital employed, Wilmington appears to been achieving more with less, since the business is using 23% less capital to run its operation. Wilmington may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.
What We Can Learn From Wilmington's ROCE
In summary, it's great to see that Wilmington has been able to turn things around and earn higher returns on lower amounts of capital. Since the stock has returned a solid 52% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.
Wilmington does have some risks though, and we've spotted 1 warning sign for Wilmington that you might be interested in.