Returns On Capital At Global Water Resources (NASDAQ:GWRS) Paint An Interesting Picture
What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Global Water Resources (NASDAQ:GWRS) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
What is Return On Capital Employed (ROCE)?
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. Analysts use this formula to calculate it for Global Water Resources:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.026 = US$7.0m ÷ (US$275m - US$9.4m) (Based on the trailing twelve months to June 2020).
So, Global Water Resources has an ROCE of 2.6%. Even though it's in line with the industry average of 3.4%, it's still a low return by itself.
Check out our latest analysis for Global Water Resources
In the above chart we have measured Global Water Resources' 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 Global Water Resources here for free.
How Are Returns Trending?
Things have been pretty stable at Global Water Resources, with its capital employed and returns on that capital staying somewhat the same for the last five years. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So don't be surprised if Global Water Resources doesn't end up being a multi-bagger in a few years time.
One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 3.4% of total assets, is good to see from a business owner's perspective. Effectively suppliers now fund less of the business, which can lower some elements of risk.
What We Can Learn From Global Water Resources' ROCE
In a nutshell, Global Water Resources has been trudging along with the same returns from the same amount of capital over the last five years. Although the market must be expecting these trends to improve because the stock has gained 30% over the last three years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.
One more thing: We've identified 5 warning signs with Global Water Resources (at least 1 which is a bit concerning) , and understanding these would certainly be useful.
While Global Water Resources 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.
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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