NASDAQ:CWCO) has the makings of a multi-bagger going forward, but let’s have a look at why that may be.” data-reactid=”28″ type=”text”>What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. This shows us that it’s a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don’t think Consolidated Water (NASDAQ:CWCO) has the makings of a multi-bagger going forward, but let’s have a look at why that may be.
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. To calculate this metric for Consolidated Water, this is the formula:
(Based on the trailing twelve months to June 2020).” data-reactid=”36″ type=”text”>0.055 = US$9.5m ÷ (US$181m – US$8.0m) (Based on the trailing twelve months to June 2020).
Check out our latest analysis for Consolidated Water ” data-reactid=”38″ type=”text”> Check out our latest analysis for Consolidated Water
report on analyst forecasts for the company.” data-reactid=”51″ type=”text”>Above you can see how the current ROCE for Consolidated Water compares to its prior returns on capital, but there’s only so much you can tell from the past. If you’re interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
How Are Returns Trending?
Over the past five years, Consolidated Water’s ROCE and capital employed have both remained mostly flat. This tells us the company isn’t reinvesting in itself, so it’s plausible that it’s past the growth phase. So don’t be surprised if Consolidated Water doesn’t end up being a multi-bagger in a few years time.
The Bottom Line
In summary, Consolidated Water isn’t compounding its earnings but is generating stable returns on the same amount of capital employed. And with the stock having returned a mere 26% in the last five years to shareholders, you could argue that they’re aware of these lackluster trends. Therefore, if you’re looking for a multi-bagger, we’d propose looking at other options.
4 warning signs that you should be aware of.” data-reactid=”56″ type=”text”>Like most companies, Consolidated Water does come with some risks, and we’ve found 4 warning signs that you should be aware of.
list of companies with good balance sheets and impressive returns on equity.” data-reactid=”57″ type=”text”>If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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.