Williams Companies (NYSE:WMB) Is Experiencing Growth In Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. With that in mind, we've noticed some promising trends at Williams Companies (NYSE:WMB) so let's look a bit deeper.

What Is 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. To calculate this metric for Williams Companies, this is the formula:

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

0.093 = US$4.2b ÷ (US$51b - US$5.5b) (Based on the trailing twelve months to September 2023).

Therefore, Williams Companies has an ROCE of 9.3%. In absolute terms, that's a low return and it also under-performs the Oil and Gas industry average of 17%.

See our latest analysis for Williams Companies

In the above chart we have measured Williams Companies' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Williams Companies here for free.

What The Trend Of ROCE Can Tell Us

Williams Companies has not disappointed with their ROCE growth. The figures show that over the last five years, ROCE has grown 114% whilst employing roughly the same amount of capital. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

The Bottom Line On Williams Companies' ROCE

In summary, we're delighted to see that Williams Companies has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Since the stock has returned a solid 97% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

If you want to know some of the risks facing Williams Companies we've found 2 warning signs (1 is concerning!) that you should be aware of before investing here.

While Williams Companies isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.