Returns On Capital Are A Standout For Advanced Drainage Systems (NYSE:WMS)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. 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 Advanced Drainage Systems (NYSE:WMS) looks great, so lets see what the trend can tell us.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Advanced Drainage Systems:

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

0.27 = US$705m ÷ (US$3.0b - US$420m) (Based on the trailing twelve months to June 2023).

Therefore, Advanced Drainage Systems has an ROCE of 27%. 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 to see what analysts are forecasting going forward, you should check out our free report for Advanced Drainage Systems.

What The Trend Of ROCE Can Tell Us

Advanced Drainage Systems is displaying some positive trends. Over the last five years, returns on capital employed have risen substantially to 27%. Basically the business is earning more per dollar of capital invested and in addition to that, 207% 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.

Our Take On Advanced Drainage Systems' ROCE

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 358% total return over the last five years tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

On a separate note, we've found 2 warning signs for Advanced Drainage Systems you'll probably want to know about.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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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.