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

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. So when we looked at Otter Tail (NASDAQ:OTTR) and its trend of ROCE, we really liked what we saw.

Understanding 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)

0.13 = US$403m ÷ (US$3.3b - US$208m) (Based on the trailing twelve months to March 2024).

Thus, Otter Tail has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 4.8% generated by the Electric Utilities industry.

See our latest analysis for Otter Tail

In the above chart we have measured Otter Tail's 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 Otter Tail for free.

So How Is Otter Tail's ROCE Trending?

The trends we've noticed at Otter Tail are quite reassuring. The data shows that returns on capital have increased substantially over the last five years to 13%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 64%. So we're very much inspired by what we're seeing at Otter Tail thanks to its ability to profitably reinvest capital.

In Conclusion...

In summary, it's great to see that Otter Tail can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 87% return over the last five years. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

One more thing: We've identified 2 warning signs with Otter Tail (at least 1 which makes us a bit uncomfortable) , and understanding them would certainly be useful.

While Otter Tail 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com