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Will Casella Waste Systems (NASDAQ:CWST) Multiply In Value Going Forward?

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·3 min read
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If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. Although, when we looked at Casella Waste Systems (NASDAQ:CWST), it didn't seem to tick all of these boxes.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Casella Waste Systems, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.077 = US$66m ÷ (US$994m - US$138m) (Based on the trailing twelve months to September 2020).

Therefore, Casella Waste Systems has an ROCE of 7.7%. Ultimately, that's a low return and it under-performs the Commercial Services industry average of 9.9%.

See our latest analysis for Casella Waste Systems

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roce

Above you can see how the current ROCE for Casella Waste Systems 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 Casella Waste Systems here for free.

How Are Returns Trending?

There are better returns on capital out there than what we're seeing at Casella Waste Systems. The company has employed 48% more capital in the last five years, and the returns on that capital have remained stable at 7.7%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

What We Can Learn From Casella Waste Systems' ROCE

In conclusion, Casella Waste Systems has been investing more capital into the business, but returns on that capital haven't increased. Yet to long term shareholders the stock has gifted them an incredible 876% return in the last five years, so the market appears to be rosy about its future. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Casella Waste Systems (of which 1 can't be ignored!) that you should know about.

While Casella Waste Systems isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

This article by Simply Wall St is general in nature. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.