Returns Are Gaining Momentum At Watts Water Technologies (NYSE:WTS)

By
Simply Wall St
Published
July 01, 2021
NYSE:WTS
Source: Shutterstock

What are the early trends we should look for to identify a stock that could 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, Watts Water Technologies (NYSE:WTS) looks quite promising in regards to its trends of return on capital.

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. To calculate this metric for Watts Water Technologies, this is the formula:

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

0.14 = US$206m ÷ (US$1.8b - US$345m) (Based on the trailing twelve months to March 2021).

Thus, Watts Water Technologies has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Machinery industry average of 9.1% it's much better.

View our latest analysis for Watts Water Technologies

roce
NYSE:WTS Return on Capital Employed July 1st 2021

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

The Trend Of ROCE

Watts Water Technologies' ROCE growth is quite impressive. The figures show that over the last five years, ROCE has grown 180% whilst employing roughly the same amount of capital. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

What We Can Learn From Watts Water Technologies' ROCE

As discussed above, Watts Water Technologies appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Since the stock has returned a staggering 169% to shareholders over the last five years, it looks like investors are recognizing these changes. 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.

One more thing to note, we've identified 1 warning sign with Watts Water Technologies and understanding it should be part of your investment process.

While Watts Water Technologies may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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This article by Simply Wall St is general in nature. 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.
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