Here's What To Make Of Evoqua Water Technologies' (NYSE:AQUA) Decelerating Rates Of Return

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Having said that, from a first glance at Evoqua Water Technologies (NYSE:AQUA) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

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)

0.069 = US$117m ÷ (US$2.1b - US$431m) (Based on the trailing twelve months to March 2022).

Therefore, Evoqua Water Technologies has an ROCE of 6.9%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 10%.

View our latest analysis for Evoqua Water Technologies

In the above chart we have measured Evoqua Water Technologies' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Can We Tell From Evoqua Water Technologies' ROCE Trend?

The returns on capital haven't changed much for Evoqua Water Technologies in recent years. Over the past five years, ROCE has remained relatively flat at around 6.9% and the business has deployed 59% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

The Bottom Line On Evoqua Water Technologies' ROCE

Long story short, while Evoqua Water Technologies has been reinvesting its capital, the returns that it's generating haven't increased. Yet to long term shareholders the stock has gifted them an incredible 190% return in the last three years, so the market appears to be rosy about its future. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Evoqua Water Technologies (of which 1 can't be ignored!) that you should 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.