Here's What's Concerning About US Ecology's (NASDAQ:ECOL) Returns On Capital

By
Simply Wall St
Published
August 18, 2021
NasdaqGS:ECOL
Source: Shutterstock

There are a few key trends to look for if we want to identify the next multi-bagger. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think US Ecology (NASDAQ:ECOL) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. The formula for this calculation on US Ecology is:

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

0.023 = US$38m ÷ (US$1.8b - US$181m) (Based on the trailing twelve months to June 2021).

Therefore, US Ecology has an ROCE of 2.3%. In absolute terms, that's a low return and it also under-performs the Commercial Services industry average of 7.9%.

Check out our latest analysis for US Ecology

roce
NasdaqGS:ECOL Return on Capital Employed August 19th 2021

Above you can see how the current ROCE for US Ecology compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

The Trend Of ROCE

When we looked at the ROCE trend at US Ecology, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 2.3% from 11% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

The Key Takeaway

While returns have fallen for US Ecology in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. However, despite the promising trends, the stock has fallen 17% over the last five years, so there might be an opportunity here for astute investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

US Ecology could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation on our platform quite valuable.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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