Returns On Capital At Evoqua Water Technologies (NYSE:AQUA) Have Hit The Brakes

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Having said that, from a first glance at Evoqua Water Technologies (NYSE:AQUA) 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)?

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 Evoqua Water Technologies is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.072 = US$123m ÷ (US$2.2b - US$457m) (Based on the trailing twelve months to June 2022).

Thus, Evoqua Water Technologies has an ROCE of 7.2%. Ultimately, that's a low return and it under-performs the Machinery industry average of 10%.

View our latest analysis for Evoqua Water Technologies

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 to see what analysts are forecasting going forward, you should check out our free report for Evoqua Water Technologies.

What Can We Tell From Evoqua Water Technologies' ROCE Trend?

The returns on capital haven't changed much for Evoqua Water Technologies in recent years. Over the past five years, ROCE has remained relatively flat at around 7.2% and the business has deployed 57% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

The Bottom Line

In conclusion, Evoqua Water Technologies has been investing more capital into the business, but returns on that capital haven't increased. Since the stock has gained an impressive 84% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Evoqua Water Technologies does have some risks, we noticed 2 warning signs (and 1 which is concerning) we think you should know about.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

Join A Paid User Research Session
You’ll receive a US$30 Amazon Gift card for 1 hour of your time while helping us build better investing tools for the individual investors like yourself. Sign up here