Gelsenwasser (FRA:WWG) Is Reinvesting At Lower Rates Of Return
Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Gelsenwasser (FRA:WWG), we don't think it's current trends fit the mold of a multi-bagger.
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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. Analysts use this formula to calculate it for Gelsenwasser:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.019 = €40m ÷ (€3.0b - €867m) (Based on the trailing twelve months to December 2024).
Thus, Gelsenwasser has an ROCE of 1.9%. In absolute terms, that's a low return and it also under-performs the Integrated Utilities industry average of 7.5%.
Check out our latest analysis for Gelsenwasser
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'd like to look at how Gelsenwasser has performed in the past in other metrics, you can view this free graph of Gelsenwasser's past earnings, revenue and cash flow.
On the surface, the trend of ROCE at Gelsenwasser doesn't inspire confidence. Around five years ago the returns on capital were 2.9%, but since then they've fallen to 1.9%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.
From the above analysis, we find it rather worrisome that returns on capital and sales for Gelsenwasser have fallen, meanwhile the business is employing more capital than it was five years ago. It should come as no surprise then that the stock has fallen 56% over the last five years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.
If you want to continue researching Gelsenwasser, you might be interested to know about the 1 warning sign that our analysis has discovered.
While Gelsenwasser 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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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.
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