VA Tech Wabag (NSE:WABAG) Has Some Way To Go To Become A Multi-Bagger

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, the ROCE of VA Tech Wabag (NSE:WABAG) looks decent, right now, so lets see what the trend of returns can tell us.

What Is 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 VA Tech Wabag:

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

0.16 = ₹4.0b ÷ (₹47b - ₹21b) (Based on the trailing twelve months to December 2024).

Therefore, VA Tech Wabag has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the Water Utilities industry average of 7.5% it's much better.

See our latest analysis for VA Tech Wabag

In the above chart we have measured VA Tech Wabag's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering VA Tech Wabag for free.

The Trend Of ROCE

While the returns on capital are good, they haven't moved much. The company has consistently earned 16% for the last five years, and the capital employed within the business has risen 87% in that time. 16% 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.

One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 45% of total assets, is good to see from a business owner's perspective. Effectively suppliers now fund less of the business, which can lower some elements of risk. We'd like to see this trend continue though because as it stands today, thats still a pretty high level.

What We Can Learn From VA Tech Wabag's ROCE

The main thing to remember is that VA Tech Wabag has proven its ability to continually reinvest at respectable rates of return. And the stock has done incredibly well with a 1,413% return over the last five years, so long term investors are no doubt ecstatic with that result. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.

If you're still interested in VA Tech Wabag it's worth checking out our FREE intrinsic value approximation for WABAG to see if it's trading at an attractive price in other respects.

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.