If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. With that in mind, we've noticed some promising trends at Wix.com (NASDAQ:WIX) so let's look a bit deeper.
What Is 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. Analysts use this formula to calculate it for Wix.com:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0083 = US$8.5m ÷ (US$1.8b - US$790m) (Based on the trailing twelve months to December 2023).
So, Wix.com has an ROCE of 0.8%. In absolute terms, that's a low return and it also under-performs the IT industry average of 13%.
Above you can see how the current ROCE for Wix.com compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Wix.com .
So How Is Wix.com's ROCE Trending?
The fact that Wix.com is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses five years ago, but now it's earning 0.8% which is a sight for sore eyes. In addition to that, Wix.com is employing 101% more capital than previously which is expected of a company that's trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.
On a separate but related note, it's important to know that Wix.com has a current liabilities to total assets ratio of 44%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.
The Bottom Line On Wix.com's ROCE
In summary, it's great to see that Wix.com has managed to break into profitability and is continuing to reinvest in its business. Since the stock has only returned 28% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.
Wix.com does have some risks though, and we've spotted 3 warning signs for Wix.com that you might be interested in.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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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.