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If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, Evoqua Water Technologies (NYSE:AQUA) looks quite promising in regards to its trends of return on capital.
Return On Capital Employed (ROCE): What is it?
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. To calculate this metric for Evoqua Water Technologies, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.086 = US$132m ÷ (US$1.9b - US$347m) (Based on the trailing twelve months to March 2021).
So, Evoqua Water Technologies has an ROCE of 8.6%. Even though it's in line with the industry average of 9.4%, it's still a low return by itself.
Above you can see how the current ROCE for Evoqua Water Technologies 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 Evoqua Water Technologies here for free.
What Can We Tell From Evoqua Water Technologies' ROCE Trend?
We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. Over the last five years, returns on capital employed have risen substantially to 8.6%. The amount of capital employed has increased too, by 70%. So we're very much inspired by what we're seeing at Evoqua Water Technologies thanks to its ability to profitably reinvest capital.
The Bottom Line On Evoqua Water Technologies' ROCE
All in all, it's terrific to see that Evoqua Water Technologies is reaping the rewards from prior investments and is growing its capital base. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 62% return over the last three years. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.
One more thing, we've spotted 4 warning signs facing Evoqua Water Technologies that you might find interesting.
While Evoqua Water Technologies 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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