If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. 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.
What Is Return On Capital Employed (ROCE)?
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. To calculate this metric for Watts Water Technologies, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.19 = US$370m ÷ (US$2.3b - US$407m) (Based on the trailing twelve months to March 2024).
So, Watts Water Technologies has an ROCE of 19%. On its own, that's a standard return, however it's much better than the 13% generated by the Machinery industry.
Above you can see how the current ROCE for Watts 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 Watts Water Technologies for free.
What The Trend Of ROCE Can Tell Us
Watts Water Technologies is displaying some positive trends. The data shows that returns on capital have increased substantially over the last five years to 19%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 41%. 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.
Our Take 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. Since the stock has returned a staggering 107% to shareholders over the last five years, it looks like investors are recognizing these changes. 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.
One more thing to note, we've identified 1 warning sign with Watts Water Technologies and understanding it should be part of your investment process.
While Watts Water Technologies 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com