If you're looking for a multi-bagger, there's a few things to 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 California Water Service Group's (NYSE:CWT) returns on capital, so let's have a look.
Understanding Return On Capital Employed (ROCE)
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for California Water Service Group:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.054 = US$237m ÷ (US$4.9b - US$513m) (Based on the trailing twelve months to June 2024).
Therefore, California Water Service Group has an ROCE of 5.4%. In absolute terms, that's a low return, but it's much better than the Water Utilities industry average of 4.4%.
Above you can see how the current ROCE for California Water Service Group 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 California Water Service Group for free.
What Does the ROCE Trend For California Water Service Group Tell Us?
While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. Over the last five years, returns on capital employed have risen substantially to 5.4%. 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 66%. So we're very much inspired by what we're seeing at California Water Service Group thanks to its ability to profitably reinvest capital.
The Bottom Line
In summary, it's great to see that California Water Service Group 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 only returned 15% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So with that in mind, we think the stock deserves further research.
One more thing to note, we've identified 2 warning signs with California Water Service Group and understanding these should be part of your investment process.
While California Water Service Group 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.
