What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. Speaking of which, we noticed some great changes in Wellard's (ASX:WLD) returns on capital, so let's have a look.

Our free stock report includes 1 warning sign investors should be aware of before investing in Wellard. Read for free now.

Understanding Return On Capital Employed (ROCE)

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 Wellard is:

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).

Thus, Wellard has an ROCE of 7.5%. In absolute terms, that's a low return but it's around the Food industry average of 7.6%.

See our latest analysis for Wellard

Historical performance is a great place to start when researching a stock so above you can see the gauge for Wellard's ROCE against it's prior returns. If you'd like to look at how Wellard has performed in the past in other metrics, you can view this free graph of Wellard's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

Like most people, we're pleased that Wellard is now generating some pretax earnings. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 7.5% on their capital employed. 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.

One more thing to note, Wellard has decreased current liabilities to 14% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

In Conclusion...

From what we've seen above, Wellard has managed to increase it's returns on capital all the while reducing it's capital base. Since the stock has returned a staggering 450% to shareholders over the last five years, it looks like investors are recognizing these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

One more thing to note, we've identified 1 warning sign with Wellard and understanding this should be part of your investment process.

While Wellard may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list 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.