Investors Will Want Otter Tail's (NASDAQ:OTTR) Growth In ROCE To Persist
Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Otter Tail's (NASDAQ:OTTR) returns on capital, so let's have a look.
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. Analysts use this formula to calculate it for Otter Tail:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.15 = US$407m ÷ (US$2.9b - US$242m) (Based on the trailing twelve months to September 2022).
Thus, Otter Tail has an ROCE of 15%. In absolute terms, that's a satisfactory return, but compared to the Electric Utilities industry average of 4.6% it's much better.
Check out our latest analysis for Otter Tail
In the above chart we have measured Otter Tail's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Otter Tail here for free.
How Are Returns Trending?
Investors would be pleased with what's happening at Otter Tail. Over the last five years, returns on capital employed have risen substantially to 15%. Basically the business is earning more per dollar of capital invested and in addition to that, 54% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.
The Bottom Line
A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Otter Tail has. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 61% return over the last five years. Therefore, we think it would be worth your time to check if these trends are going to continue.
Otter Tail does have some risks, we noticed 3 warning signs (and 1 which doesn't sit too well with us) we think you should know about.
While Otter Tail isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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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