BQE Water's (CVE:BQE) Returns On Capital Are Heading Higher

What trends should we look for it we want to identify stocks that can 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at BQE Water (CVE:BQE) 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. The formula for this calculation on BQE Water is:

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

0.095 = CA$1.5m ÷ (CA$19m - CA$2.7m) (Based on the trailing twelve months to September 2023).

Therefore, BQE Water has an ROCE of 9.5%. On its own that's a low return on capital but it's in line with the industry's average returns of 8.6%.

View our latest analysis for BQE Water

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how BQE Water has performed in the past in other metrics, you can view this free graph of BQE Water's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

We're delighted to see that BQE Water is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses five years ago, but now it's earning 9.5% which is a sight for sore eyes. Not only that, but the company is utilizing 242% more capital than before, but that's to be expected from a company trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 14%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. This tells us that BQE Water has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

Our Take On BQE Water's ROCE

In summary, it's great to see that BQE Water has managed to break into profitability and is continuing to reinvest in its business. And a remarkable 473% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if BQE Water can keep these trends up, it could have a bright future ahead.

On a final note, we found 3 warning signs for BQE Water (1 is a bit concerning) you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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.