Returns On Capital Are Showing Encouraging Signs At Grey Wolf Animal Health (CVE:WOLF)
If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at Grey Wolf Animal Health (CVE:WOLF) and its trend of ROCE, we really liked what we saw.
Return On Capital Employed (ROCE): What Is It?
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. The formula for this calculation on Grey Wolf Animal Health is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.008 = CA$134k ÷ (CA$36m - CA$20m) (Based on the trailing twelve months to December 2021).
Thus, Grey Wolf Animal Health has an ROCE of 0.8%. In absolute terms, that's a low return and it also under-performs the Household Products industry average of 14%.
View our latest analysis for Grey Wolf Animal Health
Historical performance is a great place to start when researching a stock so above you can see the gauge for Grey Wolf Animal Health's ROCE against it's prior returns. If you're interested in investigating Grey Wolf Animal Health's past further, check out this free graph of past earnings, revenue and cash flow.
What The Trend Of ROCE Can Tell Us
We're delighted to see that Grey Wolf Animal Health is reaping rewards from its investments and is now generating some pre-tax profits. About one year ago the company was generating losses but things have turned around because it's now earning 0.8% on its capital. In addition to that, Grey Wolf Animal Health is employing 220% more capital than previously which is expected of a company that's trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.
On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 54% of its operations, which isn't ideal. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.
The Key Takeaway
To the delight of most shareholders, Grey Wolf Animal Health has now broken into profitability. And since the stock has fallen 55% over the last year, there might be an opportunity here. That being the case, research into the company's current valuation metrics and future prospects seems fitting.
One final note, you should learn about the 3 warning signs we've spotted with Grey Wolf Animal Health (including 2 which are significant) .
While Grey Wolf Animal Health 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.
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