Capital Allocation Trends At Evoqua Water Technologies (NYSE:AQUA) Aren't Ideal

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Evoqua Water Technologies (NYSE:AQUA) and its ROCE trend, we weren't exactly thrilled.

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

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Evoqua Water Technologies is:

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

0.073 = US$126m ÷ (US$2.2b - US$487m) (Based on the trailing twelve months to December 2022).

Therefore, Evoqua Water Technologies has an ROCE of 7.3%. Ultimately, that's a low return and it under-performs the Machinery industry average of 11%.

See our latest analysis for Evoqua Water Technologies

Above you can see how the current ROCE for Evoqua Water Technologies 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 Evoqua Water Technologies.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Evoqua Water Technologies, we didn't gain much confidence. Around five years ago the returns on capital were 11%, but since then they've fallen to 7.3%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

Our Take On Evoqua Water Technologies' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Evoqua Water Technologies is reinvesting for growth and has higher sales as a result. And the stock has done incredibly well with a 107% 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.

On a separate note, we've found 1 warning sign for Evoqua Water Technologies you'll probably want to know about.

While Evoqua Water Technologies 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.