Returns On Capital Are Showing Encouraging Signs At Otter Tail (NASDAQ:OTTR)

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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at Otter Tail (NASDAQ:OTTR) and its trend of ROCE, we really liked what we saw.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Otter Tail, this is the formula:

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

0.14 = US$365m ÷ (US$2.9b - US$288m) (Based on the trailing twelve months to June 2022).

Thus, Otter Tail has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Electric Utilities industry average of 4.4% it's much better.

See our latest analysis for Otter Tail

Above you can see how the current ROCE for Otter Tail 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 Otter Tail.

What Does the ROCE Trend For Otter Tail Tell Us?

The trends we've noticed at Otter Tail are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 14%. The amount of capital employed has increased too, by 52%. So we're very much inspired by what we're seeing at Otter Tail thanks to its ability to profitably reinvest capital.

The Bottom Line

To sum it up, Otter Tail has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a staggering 119% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

If you'd like to know more about Otter Tail, we've spotted 2 warning signs, and 1 of them is concerning.

While Otter Tail 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. 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.