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If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think US Ecology (NASDAQ:ECOL) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
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 US Ecology is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.03 = US$53m ÷ (US$1.9b - US$159m) (Based on the trailing twelve months to September 2020).
Thus, US Ecology has an ROCE of 3.0%. In absolute terms, that's a low return and it also under-performs the Commercial Services industry average of 9.9%.
Above you can see how the current ROCE for US Ecology compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for US Ecology.
What Can We Tell From US Ecology's ROCE Trend?
When we looked at the ROCE trend at US Ecology, we didn't gain much confidence. Around five years ago the returns on capital were 11%, but since then they've fallen to 3.0%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.
In summary, despite lower returns in the short term, we're encouraged to see that US Ecology is reinvesting for growth and has higher sales as a result. In light of this, the stock has only gained 14% over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.
If you'd like to know about the risks facing US Ecology, we've discovered 1 warning sign that you should be aware of.
While US Ecology 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.
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