Investors Could Be Concerned With CSW Industrials' (NASDAQ:CSWI) Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at CSW Industrials (NASDAQ:CSWI), it didn't seem to tick all of these boxes.

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Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on CSW Industrials is:

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

0.15 = US$183m ÷ (US$1.4b - US$135m) (Based on the trailing twelve months to December 2024).

Therefore, CSW Industrials has an ROCE of 15%. That's a pretty standard return and it's in line with the industry average of 15%.

Check out our latest analysis for CSW Industrials

In the above chart we have measured CSW Industrials' 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 CSW Industrials for free.

What Can We Tell From CSW Industrials' ROCE Trend?

We weren't thrilled with the trend because CSW Industrials' ROCE has reduced by 27% over the last five years, while the business employed 271% more capital. That being said, CSW Industrials raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. It's unlikely that all of the funds raised have been put to work yet, so as a consequence CSW Industrials might not have received a full period of earnings contribution from it.

In Conclusion...

In summary, despite lower returns in the short term, we're encouraged to see that CSW Industrials is reinvesting for growth and has higher sales as a result. And the stock has done incredibly well with a 301% return over the last five years, so long term investors are no doubt ecstatic with that result. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

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

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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.