Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. Having said that, from a first glance at Winnebago Industries (NYSE:WGO) we aren’t jumping out of our chairs at how returns are trending, but let’s have a deeper look.
Return On Capital Employed (ROCE): What is it?
If you haven’t worked with ROCE before, it measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Winnebago Industries is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.12 = US$175m ÷ (US$1.8b – US$313m) (Based on the trailing twelve months to November 2020).
Thus, Winnebago Industries has an ROCE of 12%. In absolute terms, that’s a pretty normal return, and it’s somewhat close to the Auto industry average of 11%.
Above you can see how the current ROCE for Winnebago Industries compares to its prior returns on capital, but there’s only so much you can tell from the past. If you’d like to see what analysts are forecasting going forward, you should check out our free report for Winnebago Industries.
What Does the ROCE Trend For Winnebago Industries Tell Us?
When we looked at the ROCE trend at Winnebago Industries, we didn’t gain much confidence. Around five years ago the returns on capital were 21%, but since then they’ve fallen to 12%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.
The Key Takeaway
While returns have fallen for Winnebago Industries in recent times, we’re encouraged to see that sales are growing and that the business is reinvesting in its operations. And long term investors must be optimistic going forward because the stock has returned a huge 325% to shareholders in the last five years. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.
On a final note, we’ve found 3 warning signs for Winnebago Industries that we think you should be aware of.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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