American Water Works Company (NYSE:AWK) Has More To Do To Multiply In Value Going Forward

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at American Water Works Company (NYSE:AWK) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for American Water Works Company, this is the formula:

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

0.054 = US$1.5b ÷ (US$30b - US$1.7b) (Based on the trailing twelve months to September 2023).

Thus, American Water Works Company has an ROCE of 5.4%. On its own that's a low return, but compared to the average of 4.4% generated by the Water Utilities industry, it's much better.

View our latest analysis for American Water Works Company

In the above chart we have measured American Water Works Company's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for American Water Works Company.

What The Trend Of ROCE Can Tell Us

There are better returns on capital out there than what we're seeing at American Water Works Company. The company has employed 47% more capital in the last five years, and the returns on that capital have remained stable at 5.4%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

The Bottom Line

Long story short, while American Water Works Company has been reinvesting its capital, the returns that it's generating haven't increased. And investors may be recognizing these trends since the stock has only returned a total of 33% to shareholders over the last five years. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

One more thing: We've identified 4 warning signs with American Water Works Company (at least 1 which is a bit concerning) , and understanding them would certainly be useful.

While American Water Works Company 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.