Yahoo Finance Slowing Rates Of Return At Water Intelligence (LON:WATR) Leave Little Room For Excitement
If you're looking for a multi-bagger, there's a few things to 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Water Intelligence (LON:WATR) and its ROCE trend, we weren't exactly thrilled.
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. The formula for this calculation on Water Intelligence is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.091 = US$7.4m ÷ (US$97m - US$17m) (Based on the trailing twelve months to June 2023).
Therefore, Water Intelligence has an ROCE of 9.1%. On its own, that's a low figure but it's around the 11% average generated by the Commercial Services industry.
Check out our latest analysis for Water Intelligence
In the above chart we have measured Water Intelligence'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 Water Intelligence here for free.
How Are Returns Trending?
The returns on capital haven't changed much for Water Intelligence in recent years. Over the past five years, ROCE has remained relatively flat at around 9.1% and the business has deployed 390% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.
The Key Takeaway
In summary, Water Intelligence has simply been reinvesting capital and generating the same low rate of return as before. Unsurprisingly, the stock has only gained 2.6% over the last five years, which potentially indicates that investors are accounting for this going forward. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.
On a separate note, we've found 1 warning sign for Water Intelligence you'll probably want to know about.
While Water Intelligence may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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.
