We Think Watts Water Technologies (NYSE:WTS) Might Have The DNA Of A Multi-Bagger

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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at the ROCE trend of Watts Water Technologies (NYSE:WTS) we really liked what we saw.

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. The formula for this calculation on Watts Water Technologies is:

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

0.21 = US$316m ÷ (US$1.9b - US$379m) (Based on the trailing twelve months to September 2022).

Thus, Watts Water Technologies has an ROCE of 21%. In absolute terms that's a great return and it's even better than the Machinery industry average of 11%.

See our latest analysis for Watts Water Technologies

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, you can check out the forecasts from the analysts covering Watts Water Technologies here for free.

What Does the ROCE Trend For Watts Water Technologies Tell Us?

Watts Water Technologies has not disappointed with their ROCE growth. The figures show that over the last five years, ROCE has grown 87% 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.

The Key Takeaway

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. And a remarkable 142% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.

While Watts Water Technologies looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether WTS is currently trading for a fair price.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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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.