The Return Trends At Watts Water Technologies (NYSE:WTS) Look Promising
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. Speaking of which, we noticed some great changes in Watts Water Technologies' (NYSE:WTS) returns on capital, so let's have a look.
Return On Capital Employed (ROCE): What Is It?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Watts Water Technologies:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.19 = US$356m ÷ (US$2.3b - US$406m) (Based on the trailing twelve months to December 2023).
So, Watts Water Technologies has an ROCE of 19%. In absolute terms, that's a satisfactory return, but compared to the Machinery industry average of 13% it's much better.
Check out our latest analysis for Watts Water Technologies
In the above chart we have measured Watts Water Technologies' 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 analyst report for Watts Water Technologies .
How Are Returns Trending?
We like the trends that we're seeing from Watts Water Technologies. Over the last five years, returns on capital employed have risen substantially to 19%. The amount of capital employed has increased too, by 46%. 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 On Watts Water Technologies' ROCE
In summary, it's great to see that Watts Water Technologies can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if Watts Water Technologies can keep these trends up, it could have a bright future ahead.
If you want to continue researching Watts Water Technologies, you might be interested to know about the 1 warning sign that our analysis has discovered.
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.
