Will The ROCE Trend At Cleanaway Waste Management (ASX:CWY) Continue?

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. With that in mind, we've noticed some promising trends at Cleanaway Waste Management (ASX:CWY) so let's look a bit deeper.

Understanding 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 Cleanaway Waste Management:

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

0.049 = AU$194m ÷ (AU$4.5b - AU$520m) (Based on the trailing twelve months to June 2020).

Thus, Cleanaway Waste Management has an ROCE of 4.9%. In absolute terms, that's a low return and it also under-performs the Commercial Services industry average of 12%.

Check out our latest analysis for Cleanaway Waste Management

Above you can see how the current ROCE for Cleanaway Waste Management 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 Cleanaway Waste Management here for free.

So How Is Cleanaway Waste Management's ROCE Trending?

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The data shows that returns on capital have increased substantially over the last five years to 4.9%. The amount of capital employed has increased too, by 57%. 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.

In Conclusion...

To sum it up, Cleanaway Waste Management has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And a remarkable 281% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

While Cleanaway Waste Management looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether CWY is currently trading for a fair price.

While Cleanaway Waste Management 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. 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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