Aris Water Solutions (NYSE:ARIS) Is Experiencing Growth In Returns On Capital
If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at Aris Water Solutions (NYSE:ARIS) and its trend of ROCE, we really liked what we saw.
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. The formula for this calculation on Aris Water Solutions is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.058 = US$67m ÷ (US$1.3b - US$123m) (Based on the trailing twelve months to September 2022).
Therefore, Aris Water Solutions has an ROCE of 5.8%. Ultimately, that's a low return and it under-performs the Commercial Services industry average of 9.3%.
See our latest analysis for Aris Water Solutions
Above you can see how the current ROCE for Aris Water Solutions compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Aris Water Solutions here for free.
The Trend Of ROCE
Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The numbers show that in the last two years, the returns generated on capital employed have grown considerably to 5.8%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 22%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.
What We Can Learn From Aris Water Solutions' ROCE
All in all, it's terrific to see that Aris Water Solutions is reaping the rewards from prior investments and is growing its capital base. And with a respectable 14% awarded to those who held the stock over the last year, you could argue that these developments are starting to get the attention they deserve. In light of that, we think it's worth looking further into this stock because if Aris Water Solutions can keep these trends up, it could have a bright future ahead.
If you want to know some of the risks facing Aris Water Solutions we've found 4 warning signs (1 shouldn't be ignored!) that you should be aware of before investing here.
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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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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