If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, the ROCE of WD-40 (NASDAQ:WDFC) looks attractive right now, so lets see what the trend of returns can tell us.
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. To calculate this metric for WD-40, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.28 = US$96m ÷ (US$444m - US$105m) (Based on the trailing twelve months to May 2024).
Thus, WD-40 has an ROCE of 28%. That's a fantastic return and not only that, it outpaces the average of 19% earned by companies in a similar industry.
In the above chart we have measured WD-40's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for WD-40 .
How Are Returns Trending?
WD-40 deserves to be commended in regards to it's returns. Over the past five years, ROCE has remained relatively flat at around 28% and the business has deployed 48% more capital into its operations. Now considering ROCE is an attractive 28%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. If WD-40 can keep this up, we'd be very optimistic about its future.
The Key Takeaway
In the end, the company has proven it can reinvest it's capital at high rates of returns, which you'll remember is a trait of a multi-bagger. And since the stock has risen strongly over the last five years, it appears the market might expect this trend to continue. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.
On the other side of ROCE, we have to consider valuation. That's why we have a FREE intrinsic value estimation for WDFC on our platform that is definitely worth checking out.
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.
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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.