Returns On Capital At VA Tech Wabag (NSE:WABAG) Have Hit The Brakes

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. That's why when we briefly looked at VA Tech Wabag's (NSE:WABAG) ROCE trend, we were pretty happy with what we saw.

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 VA Tech Wabag is:

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

0.17 = ₹3.1b ÷ (₹41b - ₹23b) (Based on the trailing twelve months to March 2023).

So, VA Tech Wabag has an ROCE of 17%. In absolute terms, that's a satisfactory return, but compared to the Water Utilities industry average of 6.9% it's much better.

See our latest analysis for VA Tech Wabag

Above you can see how the current ROCE for VA Tech Wabag 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 VA Tech Wabag.

What Can We Tell From VA Tech Wabag's ROCE Trend?

While the current returns on capital are decent, they haven't changed much. The company has employed 25% more capital in the last five years, and the returns on that capital have remained stable at 17%. 17% is a pretty standard return, and it provides some comfort knowing that VA Tech Wabag has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

On a separate but related note, it's important to know that VA Tech Wabag has a current liabilities to total assets ratio of 56%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line

The main thing to remember is that VA Tech Wabag has proven its ability to continually reinvest at respectable rates of return. However, over the last five years, the stock has only delivered a 5.8% return to shareholders who held over that period. That's why it could be worth your time looking into this stock further to discover if it has more traits of a multi-bagger.

Like most companies, VA Tech Wabag does come with some risks, and we've found 2 warning signs that you should be aware of.

While VA Tech Wabag isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.