Casella Waste Systems (NASDAQ:CWST) Might Be Having Difficulty Using Its Capital Effectively
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. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Casella Waste Systems (NASDAQ:CWST) and its ROCE trend, we weren't exactly thrilled.
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 Casella Waste Systems is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.082 = US$101m ÷ (US$1.4b - US$163m) (Based on the trailing twelve months to September 2022).
Thus, Casella Waste Systems has an ROCE of 8.2%. On its own, that's a low figure but it's around the 9.3% average generated by the Commercial Services industry.
See our latest analysis for Casella Waste Systems
In the above chart we have measured Casella Waste Systems' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Casella Waste Systems.
What The Trend Of ROCE Can Tell Us
On the surface, the trend of ROCE at Casella Waste Systems doesn't inspire confidence. To be more specific, ROCE has fallen from 11% over the last five years. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
What We Can Learn From Casella Waste Systems' ROCE
In summary, despite lower returns in the short term, we're encouraged to see that Casella Waste Systems is reinvesting for growth and has higher sales as a result. And long term investors must be optimistic going forward because the stock has returned a huge 328% 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.
One more thing, we've spotted 3 warning signs facing Casella Waste Systems that you might find interesting.
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.
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