Investors Shouldn't Overlook Advanced Drainage Systems' (NYSE:WMS) Impressive Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. And in light of that, the trends we're seeing at Advanced Drainage Systems' (NYSE:WMS) look very promising so lets take a look.

What Is 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 Advanced Drainage Systems is:

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

0.23 = US$708m ÷ (US$3.5b - US$467m) (Based on the trailing twelve months to September 2024).

Therefore, Advanced Drainage Systems has an ROCE of 23%. In absolute terms that's a great return and it's even better than the Building industry average of 15%.

View our latest analysis for Advanced Drainage Systems

Above you can see how the current ROCE for Advanced Drainage Systems compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Advanced Drainage Systems for free.

What The Trend Of ROCE Can Tell Us

The trends we've noticed at Advanced Drainage Systems are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 23%. Basically the business is earning more per dollar of capital invested and in addition to that, 49% more capital is being employed now too. So we're very much inspired by what we're seeing at Advanced Drainage Systems thanks to its ability to profitably reinvest capital.

The Bottom Line

To sum it up, Advanced Drainage Systems has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And a remarkable 177% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

On a final note, we've found 1 warning sign for Advanced Drainage Systems that we think you should be aware of.

Advanced Drainage Systems is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.